GOLD TODAY – Prices consolidate but remain vulnerable

Short Term: Medium Term: Long Term: Resistances: R1 1267 20 DMA R2 1301 Break down level R3 1303.80 May high R4 1344 Top of triangle R5 1359 Brexit-day peak R6 1375.25 High so far R7 1388 HRL R8 1434 Aug 2013 high Support: S1 1359 Previous peak S2 1310.65 July low S3 1302.55 Sep 1 support S4 1301. SL S5 1267 20 DMA S6 1249 38.2% Fibo S7 1240.15 Oct 7 low S8 1230 Triangle target S9 1199.85 May low S10 1046.40 Dec low Stochastics:Bullish, but choppy Legend: R/SL= Resistance/support line HRL = horizontal resistance line UTL = Uptrend line BB = Bollinger band Fibo = Fibonacci retracement line H&S = Head-and-shouder pattern Technical Comment Analysis Spot gold prices fell to a low of $1,240.15 per oz on October 7 from a high of $1,375.25 on July 6, a drop of $135.10 or 9.8%. Prices then spent seven days consolidating before starting to work higher last week. Upside progress has become quite laboured. The 20 DMA has been moving lower – it was recently at $1,267 per oz. Prices have just got back over it. Although prices are attempting to rebound, it is still too early to say the danger of further weakness has passed. Perhaps prices are still forming a half-way pennant. The height of the summer triangle was $70. A similar swing lower from the breakout level would suggest a move to $1,230 per oz; so far prices have been as low $1,240.15. Prices would need to get back above $1,300 per oz to negate the current vulnerability. But if prices can work higher from here, it will mean the overall upward trend remains intact. Macro picture We see this recent weakness as a correction to what has been a surprising strong year for gold prices, considering how downbeat the market had become between 2012 and 2015. Of that downward move to $1,050 per oz from around $1,800, prices had recouped about 43% of the losses when they were trading at $1,375 per oz. Perhaps this latest pullback in prices is a test of the quality of underlying demand – it could be forming the right-hand shoulder of a large inverse H&S. Fund profit-taking has been evident into the latest decline – the gross long position has dropped 29.6% from the early-July high. The short position has picked up to 94,727 contracts from a low of 62,515 on early September. So that equals 115,245 contracts of long liquidation and 32,212 contracts of shorting – meaning some 147,457 contracts have been sold (equivalent to 458 tonnes). Given this volume of selling, prices seem to have held up well. We expect the sell-off and these lower prices to prompt pent-up physical buying from the likes of jewellery manufacturers but they may want to see that prices have found support first so the buying could take time to emerge. Indeed, physical gold in India has returned to a premium of between $1 to $3 per oz, having been at discounts of more than $50 per oz at times over the summer. This is a sure sign of a pick-up in demand. Seasonally, this is also a stronger time for demand ahead of the festival and wedding seasons. ETF investors have generally remained committed although some selling has emerged in recent days. Holdings were down 12 tonnes on Wednesday, October 26, and now stand at 2,154 tonnes, down from a high this year of 2,174 tonnes. We need to watch out in case more redemptions follow. Conclusion The October sell-off has knocked prices out of their sideways range but the price weakness should now revive buying interest. Prices appear to have found some support but it is too early to say there will not be another down leg. Still, it is encouraging that prices have managed to get some lift given the strength of the dollar. We remain bullish overall but would not necessarily be in a hurry to buy. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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