Commodities Corner: Gold To Test 1300
Gold appears to be taking a breather ahead of the FOMC meeting this week. According to UBS analysts the market has had a good run so far this year and some more consolidation would be healthy at this juncture, especially given the rebound in equities and recent positive surprises in US employment and inflation data. The pullbacks in gold this year have generally been relatively shallow and short-lived, not really providing investors with many chances to get in at better levels. But FOMC risks up ahead suggest that this week’s pullback could offer market participants who have so far opted to stay on the sidelines the opportunity to build gold exposure at more attractive levels
While markets expect the Fed to keep a wait-and-see, UBS believe this is the same attitude that was expressed in January and markets may get limited insight on where the Fed sees the balance of risks to the economic outlook. Investors are likely to closely examine any potential changes in the ‘dot plot’ for clues. Markets are not expecting the Fed to hike rates this week. Nevertheless, risks for gold here are slightly skewed to the downside as recent positive US data may constrain the Fed from signalling a dovish message. Tightening concerns could lead to a relatively deeper near-term correction in gold than what the market has seen so far this year, particularly given strong year-to-date price gains and the build in Comex positioning.
Gold net longs on Comex reached 23.35moz according to CFTC data as of 8 March. UBS analysts highlight this represents a 3.08moz-increase week-on-week and a net build of 21.35moz since the beginning of the year. Much of this change was due to additions to gross longs, which have gained by 78% or 14.80moz so far this year. Short-covering has also been a contributing factor, albeit to a lesser extent – gross shorts closed 38% of positions equivalent to about 6.50moz over the same period. That the build in positioning has mostly come from the growth in gross longs suggests that near-term pressure on gold is more likely coming from profit-taking rather than shorts rebuilding positions aggressively here. The latest CFTC data show a relatively small 0.50moz increase in gross shorts over the past week – the first gain since end-December – but lingering macro risks and gold’s progress on technical charts should make shorts generally more reluctant to add to positions.
A near-term correction in gold would serve as a further test for the bulk of longs that have been built this year. UBS analysts believe the extent and duration of the downside should also provide some insight on the level of conviction among investors who have expressed friendlier attitudes to gold but have so far stayed on the sidelines waiting for better entry levels. Gold’s relatively stable negative correlation with risk suggests it should hold relatively well should equities come under pressure from Fed tightening concerns. So far, there have been encouraging signs that many of the gold positions added this year have more endurance and are more strategic compared with the short-term positions taken by gold market participants in the past couple of years. We expect the downside to be ultimately contained and for the dip in gold to be bought. A test of $1200 seems possible, but we would expect the market to hold around this key psychological level. A relatively orderly consolidation in gold could provide more credibility to gold’s performance this year.
Technical & Trading Takeaway
From a trading perspective I believe Gold is at an inflection point, we can see on the weekly scale chart above that the Gold advance stalled just ahead of the weekly symmetry swing objective at 1296, to confirm a broader phase of correction on the weekly scale we really need to see a weekly close above 1300. We shall look at a daily price pattern that may set up the required 1300+ close.
Price action the daily scale looks like there is a symmetry swing support test at 1210 underway, if this level attracts buyers we should see a third push into a cycle high for this leg above 1300 as per the chart above, negation levels for this trade thesis would be a breach of 1190 support. The 1210 level not only benefits from the symmetry support but if we look to the left on the chart we can see decent market structure support at prior resistance creating confluent support for longs at this level.
If the 1210 support fails to encourage renewed upside then I anticipate a much deeper correction to develop which would see the secondary symmetry swing objective at 1140/30, this area would also present a potential inverse head an shoulders pattern, I have outlined this pattern on the chart below. If 1190 is eroded I will revisit this set up in future reports.
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