Gold: Holding Below 1,400
Mingze Wu | Sep 02, 2013 05:41AM ET
The number of bullish speculators continue to increase according to the latest Commitment of Traders report. Net bull positions for Gold climbed to 78,289 contracts, the most since 28th May as Hedge Funds and institutional traders are spotted buying ever since the climb from 1,200. However, weakness remains with Open Interest falling for the 6th consecutive week, suggesting that while Hedge Funds and other speculators are indeed buying, the number of people interested in buying is not enough to make up for the number of people who have stopped selling. This may not sound bad prima facie, but does dampen the bullish signal as it implies that the Net-Long position more than likely exaggerate the number of bulls buying.
Hourly Chart
Looking at price action recently, we can see that price has fallen significantly ever since the declaration by UK that they will not be participating in the Syrian war that US appears to be pushing for. This reduced the likelihood of US going in after losing such an important ally, and by extension the support of the rest of commonwealth nations who tend to follow UK’s lead – Canada and Australia immediately coming to mind. Gold prices dipped below the hallowed 1,400 mark by the end of Friday, but was still supported by the consolidation zone of Monday. That however has also been blown to dust thanks to Obama’s decision to call for a Congressional vote for the war decision – broadly perceived by markets to be a softening stance by him and interpreted as a U-turning action by his harshest critics. The aftermath of that was a shedding of $20 per troy ounce of gold during Monday open.
Given that COT net position is not exactly the strongest bull signal that we have, it stand to reason that Gold prices would not have breached 1,400 if not for the threat of war to begin with. With that in mind, traders should not expect Gold to be able to climb back above 1,400 based on the latest COT data alone. There must be additional fundamental drivers beyond what we have now for Gold to mount a successful attack back above 1,400 again.
Technicals suggest the same, with price facing resistance from the descending trendline which characterize the decline since UK threw in the towel before the Syrian fight has begun. Stochastic readings have yet reach Overbought, but there have been numerous peaks in the past week that has not hit Overbought anyway, so we should not be too harsh to this bearish signal. Furthermore, there appears to be a divergence between Stoch peaks and price peaks, adding further bearish pressure.
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Weekly Chart
Nothing new from the weekly chart from the week prior. The failure to breach back into the descending Channel above adds bearish pressure towards the Channel Top of the steeper channel, with 1,330-1,345 region providing interim support. Stochastic readings are flattening instead of pointing higher, but a proper bearish cycle signal is still lying in wait. Perhaps the signal will only come with the 1,330,1345 support band has been broken, hence giving us a good confirmation level for a long-term bearish move towards 1,200+ and potentially lower.
A move like this would need 2 things fundamentally – peace on earth (or at least US non-intervention in the middle east for the rest of the world) and the unwinding of the hedge fund bullish flow we’ve seen for the past 3-4 weeks. Fed’s tapering action may still have a say in short-term price action but it is unlikely that Fed will change its stance of wanting to stop QE altogether in 2014. It is still possible that September FOMC meeting may result in a non-action and hence push Gold prices higher, but the sustainability of such a push is highly suspect – additional Hedge Funds purchases notwithstanding. From a fundamental perspective, it is more likely that fundamental traders seeking a 2014 QE ending play would take any short-term rally as opportunities to short. Is it hard to achieve both? Based on what we’ve seen it is not a long shot. The only wild card would be what Hedge Funds are thinking. Traders will do well to continue monitoring the COT numbers and see any first sign of speculative bulls buckling.
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