Analysis
- Spot gold prices fell to a low of $1,240.15 per oz on October 7 from a high of $1,375.25 on July 6, a drop of $135.10 or 9.8%.
- Prices then spent seven days consolidating before starting to work higher last week.
- The 20 DMA has been moving lower – it was recently at $1,275.60 per oz. We wait to see if it acts as resistance or not.
- Although prices are attempting to rebound, it is still too early to say the danger of further weakness has passed. Perhaps prices are still forming a half-way pennant. The height of the summer triangle was $70. A similar swing lower from the breakout level would suggest a move to $1,230 per oz; so far prices have been as low $1,240.15.
- Prices would need to get back above $1,300 per oz to negate the current vulnerability. But if prices can work higher from here, it will mean the overall upward trend remains intact.
Macro picture
The shake-out on stale long liquidation seemed highly likely; it was merely a question of timing. We remain bullish overall, though, for the following reasons:
- High global debt and how can that be dealt with
- US election – will there be another populist result there? This seems less likely now.
- Negative interest rates
- Geopolitical unrest
- Potential for broad market corrections, especially in bonds and equities
The net long fund position (NLFP) dropped 15,601 contracts last week after drops of 50,289 contracts and 45,396 contracts in the two previous weeks. The NLFP is now at 179,618 contracts, down from a recent peak of 307,860 on September 6. Last week’s selling comprised 9,041 contracts of long liquidation and 6,560 contracts of short selling. Since the data covered the period after the sell-off and when prices were consolidating, it looks as it the market has absorbed the long liquidation and short selling well. This implies good buying from other parties.
This sell-off and these lower prices could prompt pent-up physical buying from the likes of jewellery manufacturers but they may want to see that prices have found support first – this may mean prices have found support. Indeed, physical gold in India has returned to a premium of up to $2 per oz, having been at discounts of more than $50 per oz at times over the summer. This is a sure sign of a pick-up in demand.
ETF investors have generally remain committed although they sold 13 tonnes on Friday, which brought holdings down to 2,161 tonnes from this year’s high of 2,174 tonnes.
Conclusion
The sell-off has knocked prices out of their sideways range and the price weakness should now revive buying interest. Friday’s CFTC report showed fund selling but the fact prices were firmer during the period of the CFTC data suggests there was enough buying around to absorb the selling.
With prices managing to get some lift despite fresh dollar strength, we are encouraged that the sell-off may have run its course and that buying may reappear.
Prices remain vulnerable for now but less so than they have done in recent weeks. We expect dips to remain well supported.
