GOLD TODAY: Holds up well despite headwinds

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1244.80 Recent high
R2 1249 50% Fibo (Jul-Dec sell-off)
R3 1295 RL
R4 1308
R5 1343-1375 2016 high ground
Support:
S1 1220 20 DMA
S2 1216.45 Recent dip low
S3 1214.75 UTL
S4 1198 38.2% Fibo 2017 rally
S5 1181.05 Jan 27 low
Stochastics:Neutral
Legend:

BB – Bollinger band

DMA – daily moving average

Fibo – Fibonacci retracement level

H&S – head-and-shouder pattern

HRL – horizontal resistance line

R/SL – resistance/support line

UTL – uptrend line

Analysis

  • Spot gold prices overcame resistance at $1,220.30 per oz on February 2, the high from January 23. They then climbed to $1,244.80 per oz on February 8 but have since run into resistance and are consolidating. They are holding up well, though, and are holding above the 20 DMA.
  • The late-January pullback seemed to have been merely a pause in the developing uptrend, which was a constructive development. This latest pullback seems like another pause.
  • The stochastics are drifting but are not giving back much ground. While this suggests that buying interest has waned, it is not a sign there is much selling interest. 
  • As we have been saying in recent weeks, there is a wall to climb – the initial breakdown level was around $1,300 per oz when prices fell out of the summer triangle; we would not be surprised by bouts of consolidation on the way up.

Macro picture

Funds trading Comex gold were doubly bearish last week: the longs cut 4,149 contracts and shorts added 3,248 contracts. The net long fund position of 109,752 contracts has ranged between 96,550 and 119,155 contracts so far this year and was in the range of 26,560-315,963 contracts last year.

Risk-on has been given a boost by better Chinese trade data, the announcement on February 9 that US President Trump will introduce tax reform policy within a few weeks and, more recently, stronger-than-expected CPI and PPI data. These developments sent the dollar and global equities higher, which has raised the opportunity cost of holding gold. The fact gold prices are managing to consolidate in high ground rather than sell off is a bullish sign, we think.

As we said above, we do not expect gold prices to rally in a straight line but, with Brexit, European elections and Greece debt in focus, geopolitical uncertainty is growing; this, we think, will be the prime driver of gold prices in the months ahead.

Gold ETFs are being bought into again. Holdings stand at 2,023 tonnes, up from a low this year of 1,939 tonnes.

Conclusion

Gold prices seem to be in a strong upward trend. We see this latest pause as simply that – a pause. The main driving force, we think, will be investor buying to protect against geopolitical uncertainty. But we would also not be surprised if consumer demand picks up in China and India. Prices may struggle on the upside without the funds trading Comex being bullish, which could mean more consolidation until their sentiment changes.

All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.
Kathleen Retourne

About Kathleen Retourne

Kathleen has been reporting on commodity markets since 2006. She joined FastMarkets in 2011 and has immersed herself into the metal industry, specialising in LME coverage. Follow her on twitter @kathretourne