Analysis
- Gold remains under pressure. Attempts to break down from the flag formation at $1,356-1,306 yesterday were limited but the metal is approaching a test of psychological support at $1,300.
- The stochastics remain in weak territory.
- Prices are testing support from the medium-term UTL formed by the December/January lows.
- Failure to hold recent support suggests $1,275-80 as an initial target area.
Macro picture
The dollar is likely to remain key to short-term price sentiment ahead of payrolls data on Friday. Expectations for a Fed rate increase at the September FOMC have grown following hawkish rhetoric from the Jackson Hole symposium last week.
Chinese data overnight signalled a modest rebound in manufacturing last month – the official PMI recovered to 50.4 in August from 49.9 in July. Meanwhile, the Markit/Caixin reading slowed to 50.0 from 50.6, suggesting activity among SMEs (small & medium-sized enterprises) stalled. The Markit reading showed declines in output, new orders and stocks. According to Zhengsheng Zhong, director of macro economic analysis at CEBM Group, “the stagnation that follows tentative signs of recovery in July may have been caused by a temporary tightening of proactive fiscal policies. Downward pressure on China’s economy remains and government support to stabilise growth must continue”.
There are signs of profit-taking among investors – ETF holdings fell 11.2 tonnes yesterday to 2,105 tonnes. They have peaked this year so far at 2,119 tonnes.
CFTC data shows the net length among Comex fund/CTAs increased 10,758 contracts in the week ending August 23. Speculators were bullish, adding 8,250 new longs as well as covering 2,508 open shorts. The further reduction is open shorts reduces the potential upside momentum from short-covering. The recent bout of consolidation leaves room for speculators to expand, with the gross long position at 359,785 contracts compared with the peak of 389,590 contracts. There remains room for profit-taking but we expect sentiment to remain bullish overall.
According to the WGC, investment-related demand totalled a record 1,063.9 tonnes in the first half of 2016, an increase of 16 percent on the same period of 2015, reflecting unprecedented demand from Western investors for paper gold such as ETFs. Physical forms such as bars and coins also recorded strong growth, with European sales boosted by the UK’s Brexit vote. In contrast, recent price strength has taken its toll on the jewellery sector, which dropped 17 percent from the first half of 2015. While mine production remains stable, rising prices have released scrap supplies into the market, with sales up 10 percent from a year previously. The WGC predicts for now that demand will continue to build in the third quarter but warns that recent momentum may be difficult to sustain.
Conclusion
Dollar strength and signs of disinvestment from institutional investors continue to create short-term pressure for gold. Further dips buying support is expected; however, bearish signals from silver could a precursor for weakness in gold, with a breach of $1,300 likely to generate deeper downside pressure.
