Gold’s gains appear dubious, and could sucker-punch bulls

Fundamentally and technically, gold appears to be a much-loved asset. And one that seems more likely than not to outperform as the year progresses due to safe-haven flows, inflation hedges and bouts of geopolitical tensions or of course trade wars. But I also doubt the correction from its record high is done yet, even if investors are on the sideline waiting to scoop up a discount. So in a nutshell, I am bullish on the weekly charts and waiting to get bearish on the daily.

Gold futures (GC) market positioning – COT report

• Traders remains heavily net-long but not at a sentiment extreme
• Net-long exposure has been retracing lower from a sentiment extreme over the past four months
• Speculative volumes (large specs and managed funds combined) has fallen -31% since its late-September peak

Together this suggests that gold remains in demand among futures traders, but we’re witnessing a rethink after a strong bullish run. The fact that both longs and shorts are also trending lower shows a lack of conviction in either direction for now, which makes sense if they’re booking profits at previously frothy levels.

And as the bullish trend remains intact on the weekly chart by a wide margin, I doubt we’re in for a particularly deep pullback. And that dips may be more likely to be bought by investors looking for any sort of discount as the year progresses.

Gold technical analysis (weekly and daily chart):

A closer look at the weekly chart shows prices holding above the 20-week SMA, which is beginning to flatten out due to the correct. A potential pennant / small triangle forming, although I am also on guard for an initial downside break given the reduction of speculative volumes and lack of any sizeable correction during its rally from the September low.

Weekly volumes are low, but that is to be expected this time of the year. On-balance volume is confirming the trend higher overall, but that doesn’t mean we cannot get a bit more of a pullback before buyers step back in.

The daily chart shows prices drifting higher alongside volumes. It looks like it wants to reach for 2700, but note resistance around 2710 (weekly VPOC) and 2720 (false break and reversal of engulfing candle). If the anticipated swing high forms around 2710, focus shifts to 26000 near the December low. A break of which brings the November low into view for bears.

For now, gold is stuck in a 'start-of-year' chop-fest as we await full liquidity to return and a fresh catalyst to arrive. And Friday's nonfarm payroll report is a top contender. Which I suspect runs the risk of pumping out another set of strong figures and keeping rate-cut bets and check and gold gains capped for now.  

Gold technical analysis (1-hour chart):

Wednesday’s high met resistance at the weekly R1 pivot (2687.6) before forming a prominent bearish engulfing candle. I suspect prices will take another dip lower today in Asia before prices drift higher as we head towards NFP.

A break above 2690 seems likely to trigger a move to 2700 given the liquidity gap in this area, but I’d be dubious of a sustained break above it give the weekly VPOC (volume price of control) around 2710 and weekly R2 at 2720.

Ultimately, I am suspicious of gains from here over the near term and will be seeking evidence of a swing high to form, and prices move lower on the daily timeframe as the month develops.

Take note that liquidity will be lower on Thursday due to the mourning of former US President Jimmy Carter. While some markets will be closing early, metals futures will trade their regular hours.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge