Analysis
- Gold prices pulled back to $1,208.50 while they consolidated. They have since rebounded to $1,263 but have stalled again. The pullback may be a test of the validity of the recently break from the bull-flag but, with prices below the 20 DMA and below $1,250, we are not bullish in the short term.
- The stochastics are also bearish.
- Having rallied almost 21 percent so far this year, it may be that a longer period of consolidation is needed.
- We still expect dips to be well supported.
Macro picture
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.
For now physical demand in Asia seems weak but lower prices may lead to a recovery in demand in Asia. If so, 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 1,813 tonnes but are still very high compared with the low of 1,479.52 tonnes.
We wait to see this evening’s CFTC data on fund activity. The long position has become extended at 263,781 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 – and with oil prices stronger too, 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.
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 has been weak recently but it is attempting a rebound, which seems to be causing a headwind for gold. The break out of the flag looked constructive but prices may need to retest the breakout level.
We are, however, bullish given the revival in investor demand (and what is driving that) and we expect there will be considerable pent-up demand for physical gold into price dips.
The improvement in the gold/silver ratio, which was last at 75.75, having been as high as 83.79, also suggests investor sentiment is becoming more bullish for precious metals. Platinum’s discount to gold has also narrowed.
