GOLD TODAY: Price rebounding on opportunistic physical buying

Short Term:
Medium Term:
Long Term:
Resistances:
R1 1,262 200 DMA
R2 1,375 2016 high (Jul)
R3 1,400 Key level
Support:
200 1,260
100 1,204
50 1,221
20 1,228
Support:
S1 1,200 Key level
S2 1,050 Medium-term support
S3 1,046 2015 low
Stochastics:
Legend:

Refer to here

Technical Comment

Momentum is positive while ADX is below 20, suggesting a weak uptrend.

Analysis

  • Gold has rebounded strongly after finding reliable support at $1,200 per oz. It is now back above its 20 DMA, which could reflect an upwsing in sentiment. Still, given that prices remain below their 200 DMA, we will stick with our negative stance over the very short term (around one month).

  • Over the longer term, we see the technical picture as fairly bearish because of the strong DTL, seen in our monthly chart. Unless gold moves firmly back above $1,300 per oz, which corresponds to the DTL from the all-time high in 2011, we will continue to believe the uptrend that started last year has ended.

  • On the upside, gold needs to take out its 200 DMA to make sure the bull market will resume this year. On the downside, we will pay a close attention to the 20 DMA, a break of which may turn sentiment negative, and $1,200 per oz, a break of which could trigger intense selling pressure toward the 2016 low.

Macro drivers

Gold is up 0.3% so far this week after enjoying a rally of 2.1% last week amid a broad-based appreciation across metals.

The outcome of the FOMC meeting on March 15 – a small rate increase and an unchanged rate outlook – resulted in some short covering in gold. Indeed, the Fed’s stance was relatively less hawkish than investors had feared, which triggered a sell-off in the dollar and a drop in US real rates. This benefited gold and other precious metals despite the concomitant surge in global risk appetite.

Safe-haven demand for gold may surge in the coming days/weeks because geopolitical tensions are growing, exacerbated by rising populism. While the Dutch favoured the status quo in its parliamentary elections, French elections are looming, with far-right candidate Marine Le Pen leading the polls. European investors may be tempted to boost their holdings in gold to hedge against a sell-off in risky assets.

Investment and speculative flows:

  • ETF investors bought about 11 tonnes of gold last week after selling roughly 17 tonnes in the preceding week. ETF investors are net sellers of 8 tonnes of gold so far in March after buying about 94 tonnes in February.
  • Speculators cut their net long fund position significantly for a second straight week over March 7-14, according to the CFTC. Specs came back in on the long side, as they did during the previous Fed rate increases in December 2016 and December 2015.

 Physicals:

  • The Chinese physical market has improved in recent weeks thanks to improved physical demand after a fall in prices. Buyers are likely to remain highly price-sensitive.
  • In India, rates have pushed still higher, reflecting stronger demand amid lower prices and the coming holiday and marriage season.
  • See our latest physicals report, published on March 14, for more details.

Conclusion

We retain our negative stance over the very short term despite the recent price rebound caused by physical buying. But we would turn neutral on a firm break above the 200 DMA. As a reminder, we turned negative on gold on March 3 at $1,234.6 per oz. Our view is that US real rates will rise and the dollar will start to strengthen again on robust US macro data, which should be gold-negative.

We are negative on gold for the next six months because we expect US real rates to climb due to the Fed tightening cycle. This should exert pressure on gold prices despite a possible pick-up in risk aversion, in our view.

Read more in our March Spotlight.

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