Gold Short Positions At Record Highs, Which Way Is North?
$GLD
Gold ended last week marginally lower thanks to Friday’s bounce which saw the precious metal momentarily surpass the 1100 handle. Friday’s counter-trend move was in response to news that Q-2 US Employment Cost Index (ECI) showed a very small rise of 0.2% in wage pressure.
Traders responded to the data by booking some profit on their Long USD and Short Gold positions as the month drew to a close.
The precious Yellow metal closed July with a 6.5% loss, which represented its biggest monthly decline since June 2013 when it fell 12%.
As the new month began is comfortable in here in the 1000-1100 zone.
Despite the weaker ECI report Friday and Monay’s overall weaker-than-expected US macro numbers, precious metals traders are wary of a potential Fed rate hike in as early as September or December.
They argue that the strong recovery in the US labor market, if sustained, may ultimately put upward pressure on wages and in turn on prices in the coming months. In anticipation of this possibility, the Fed may start tightening monetary policy sooner rather than later so as to reduce the risks of over inflation.
Inflation appears to be running at low levels across the world which is another reason it is not doing so well. The precious metal is coming under pressure from all angles. Not only has the physical demand from China been weak but optimism among managed money in the “paper” market is also falling. Evidenced by another 8% increase in Net Short positions in the week ending on 28 July, according to the CFTC.
With Net Short Gold positions being at a new record high, the correction potential is also very high in here so, the Big Q: which way is North for Gold?
The Big A: For Gold to stage a noticeable rally, it will have to climb above Key resistance level of 1100 and hold on a closing basis. This could happen given that the metal has already reached a Fibo extension area between 1083 and 1093.
The RSI is oversold at below 30, this area marks a potential exhaustion point for Gold.
So, if Gold does correct from here, it may go on to ‘fill’ the area of inefficiency that was created as a result of the sell-off last month (highlighted in Red on the chart below).
Gold could rally towards the old broken supports turned resistance at 1131.5 or 1143.0.
Sentiment is Very Bearish on Gold, and it would not take much to push the price below the Fibo exhaustion area on a closing basis. This may give rise to further follow-up technical selling which could see the metal drop towards the next Fibo extension mark at 1023 (161.8% Fibo extension of the XA swing) where it will also meet the extended point D of an AB=CD pattern. Thereafter is the psych mark of $000 and then the triangle breakdown measured target around 975.00.
Gold’s next move could be a sharp one once it breaks out of the recent range. May see this breakout at some point this week’s as more US labor market indicators are released prior to Friday’s official NFPs report, causing the USD and in turn Gold to move sharply.
India, the world’s 2nd-biggest Gold buyer after China, imposed the import restrictions last year to avert a trade deficit crisis that pushed the Rupee to record lows.
“Restrictions placed on import of Gold… stand withdrawn with immediate effect,” India’s central bank said in a statement on Saturday, 29 November.
Support for Spot Gold comes from jewelry demand from India in the lead up to and during the wedding season, which started in late September. India did record a 176% increase in Gold imports in August to US$2-B from about US$756-M.
Overall, the impact of wedding season Spot Gold buying has faded in recent times as India is no longer the world’s largest Gold consumer, partly because of the on-going government import restrictions on precious metals. If they are further relaxed, perhaps India will regain its Top spot.
India’s Akshaya Tritiya festival considered by India’s more than 900-M Hindus as an auspicious day to buyGold and Silver, fell on 21 April this year. Bullion is bought in India during festivals and marriages as part of the bridal trousseau or gifted in the form of jewelry by relatives.
Stay tuned…
HeffX-LTN
Paul Ebeling
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