Commodities Corner: Gold Near A Crucial Crossroads

Gold is rapidly approaching a crucial crossroads at the psychological 1000 level, the last leg lower has developed amid a reduction in positioning according to recent CFTC data, the impulse lower has been exacerbated by a more robust economic backdrop in the US, specifically the blockbuster October payrolls data, have led to a significant leap in the repricing of probabilities with respect to a 2015 FED lift off. Last nights release of the meeting minutes from the October meeting of the Federal Reserve has further increased the markets positive perception of a December move.

Fundamental Flows

This shift in the markets mood with respect to rates in the US has been coupled with a swift decline in Comex net long positioning, as shorter term players appear to bailing out as they are reluctant to ride losing positions into the uncertainty that December presents. The early November CFTC report illustrated the most significant shift in speculative positioning which printed its greatest decline of the year. The majority of this slide was on long contract liquidation, but a decent drive came from new short positioning, which saw its first uptick since August.

This inflection in CFTC data demonstrates longs getting squeezed out and the drive from new short exposure is occurring at a noteworthy location from a seasonality perspective, a similar positioning structure was witnessed the same time 12 months ago. Last years London Bullion Market Association conference was resoundingly bearish in tone as gold continued to print new lows for the leg down at the time similar in nature to this years conference with similar price action ensuing.

The subtle difference between the market structure of now and then is that positioning was actually at more deflated levels than has been recorded over the past month, while short positioning was pretty stretched back then, which is often the pre-requiste for a decent short covering rally. The difference between now and then is that positioning remains somewhat more elevated than 12 months ago, current readings imply that the market is positioned at levels circa twenty percent above the year to date average of 2015, these levels have remained constant even into this last leg lower. The elevated positioning doesn’t demonstrate the bloated short exposure of last November, a relatively modest fifty three percent of open interest which doesn’t really set the scene for a meaningful squeeze on the contrary it allows for a further expansion of short exposure.

The key difference between now and this time last year is that the rather large elephant in the room in the shape of the US Federal Reserve, this time last year the FED were viewed by the majority of market participants as sidelined, whereas the majority are now pricing in action before Christmas, one can only expect this sense of imminent lift off will be significantly increased with a follow up to the October jobs data, a robust print for November will leave the market pretty positive of a rate lift off.  The November NFP print is likely to be the next major catalyst for Gold price action a robust read will see a test of the psychological 1000 level, a miss will no doubt see some more repricing but in all likely hood the trajectory appears set for a move in December and as such the path of least resistance in the near term is lower.

Trading Take Aways

So now we have a sense of the fundamental and sentiment perspective on the yellow metal, lets shift our focus to the charts and take a look at the technical set up that maybe developing. On the weekly scale we have a very interesting price pattern that is close to fruition, the pattern is a three drives into a low, you can see on the chart the equality of the last three pushes lower, this type of price pattern is often a near to medium term exhaustion pattern that precedes a correction in trend and potentially a reversal. From a sentiment perspective this pattern would garner further support if we could see an intraday test and breach of the psychological 1000 level that reverses and closes positive on the day.

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  • From a trading perspective I have squared my shorts from 1190 at the the adjusted 1080 target for a $110.00 profit. I am now moving to the sidelines and monitoring the three drives pattern and specifically looking for a 1000 test that produces an intraday reversal whereby the daily candle actually closes bullish, with this set up I will be positioning on the long side to play a counter trend correction against the lows of the day which produces the signal.

Open Commodities/FX Positons

As highlighted in last weeks report the AUDUSD price pattern I was mapping triggered a long entry at .7070 this position is now risk free and I am targeting an equality corrective objective towards .7500.

For updates on these set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick