Analysis
- Gold prices pulled back to $1,208.50 while they consolidated. They have since worked their way back to $1,270.30 and were last at $1,253.
- The pullback may have been a test of the validity of the recently break from the bull-flag and, with prices back above the 20 DMA and above $1,250 again, the market looks more bullish. But the metal needs to clear recent highs again to show it has momentum.
- The stochastics have turned bullish again.
- Having rallied almost 21 percent so far this year, it is not surprising that prices are taking their time to consolidate. This could be a constructive development.
- We still expect dips to be well supported.
Macro picture
The market is seeing the latest FOMC statement as balanced-to-neutral. This has weakened the dollar, which is providing gold with some strength. While we think the fact the Fed dropped its message about concerns about global economic risk shows a bit of hawkishness, the market does not seem to see that – at least not yet.
We remain bullish towards gold generally because we feel the financial markets are vulnerable and we see negative interest rates as a positive for gold. More to the point, we sense a significant shift in sentiment from institutional investors, who have been buying ETFs aggressively this year. But with the fund longs extremely extended, we expect a correction before too long – we are surprised the FOMC statement was not seen as being more hawkish, which may have been enough to prompt a correction.
For now physical demand in Asia seems weak but lower prices may lead to a recovery there – indeed, China stepped up its imports from hong Kong to 64.1 tonnes in March from 42.9 tonnes in February and 61.8 tonnes in March last year. If physical demand does recover, ETF buyers may have to compete with Asian buyers for physical gold.
ETF holdings have drifted lower to 1,807 tonnes from a peak this year of 1,815 tonnes but are still very high compared with the low of 1,479.52 tonnes.
The latest CFTC data on fund activity showed the already extended long position grow while shorts covered too. The long position has become extended at 291,143 contracts – the highest since August 2011. The highest we have on record, dating back to 2005, is 304,564 contracts. With a relatively low gross short position and a high gross long position, there is a danger the tide may turn but for now the market remains largely bullish, it would seem.
With China appearing to be turning a corner – data out recently has been stronger – we feel that institutional investors may continue to buy into commodity baskets, which would no doubt include gold and other precious metals. So we remain generally friendly towards gold over the medium term although fund profit-taking could prompt a short-term correction.
We still expect any pullback in gold prices to prompt a pick-up in physical demand, especially in Asia – we may have seen some of this in the recent dip. More of the same would be bullish overall for gold’s medium-term outlook.
Conclusion
The dollar’s recent show of strength in mid-April led to a pullback in gold but, with the dollar testing recent lows again, gold prices are trying higher.
The charts look bullish, our medium-term outlook remains bullish, the gold/silver ratio is improving and the platinum/gold discount is shrinking, all of which suggests investor sentiment is becoming more bullish for precious metals. But we are nervous about how long the fund longs already are.
We would not be surprised by a pullback but expect dips to be well supported.
