Analysis
- Spot gold prices fell to a low of $1,240.15 per oz on October 7 from a high of $1,375.25 per oz on July 6, a drop of $135.10 or 9.8%.
- Prices then spent seven days consolidating before starting to work higher last week. Upside progress, having initally been laboured, has picked up in recent days.
- Prices are now set to mount a fresh challenge of the former support line around $1,300 per oz.
- The rebound now makes it look more likely that a base is in place.
- We have been saying recently that 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
We saw the recent weakness as a correction to what has been a surprisingly strong year for gold prices, considering how downbeat the market had become between 2012 and 2015. Of that downward move to $1,050 per oz from around $1,800, prices had recouped about 43% of the losses when they were trading at $1,375 per oz. Perhaps this latest pullback in prices is a test of the quality of underlying demand – it could be forming the right-hand shoulder of a large inverse H&S.
Fund profit-taking has been evident into the latest decline but Friday’s data showed short-covering and fresh buying. The gross long position had dropped 29.6% from the early-July high but it climbed 11,031 contracts between October 19 and October 25. The short position rose to 94,727 contracts on October 18 but subsequently dropped 6,331 contracts to 88,39 contracts. So during the pullback there was some 115,245 contracts of long liquidation and 32,212 contracts of shorting, meaning some 147,457 contracts have been sold (equivalent to 458 tonnes). Given this volume of selling, prices seem to have held up well.
We expected the sell-off and the lower prices to trigger pent-up physical buying from the likes of jewellery manufacturers but we expected they may have wanted to see that prices find support first before emerging. Indeed, physical gold in India has returned to a premium of $1-3 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. Seasonally, this is also a stronger time for demand for the festival and wedding seasons.
ETF investors have generally remained committed although some selling has emerged in recent days. Holdings were at 2,166 tonnes on November 1, down from a high this year of 2,174 tonnes.
