GOLD TODAY – Correcting for now but we doubt the rebound has ended

Otmane El Rhazi from The Bullion Desk.

Short Term: Medium Term: Long Term: Resistances: R1 1126.80 Rebound high R2 1131.60 Former support R3 1157 Former SL R4 1167 DTL R5 1188-1206 Support: S1 1157 Former SL S2 1132 UTL S3 1131.60 Nov low S4 1130.80 Today’s low (so far) S5 1110 S6 1086 1999-2011 50% Fibo S7 1077.50 Low so far S8 890 1999-2011 61.8% Fibo Stochastics:Turned lower from high ground Legend: R/SL= Resistance/support line UTL = Uptrend line BB = Bollinger band Fibo = Fibonacci retracement line Technical Comment Analysis Gold’s rebound has been impressive but it was capped by the DTL. Prices are now testing the steep, new UTL. A look at the chart shows prices had got back to the base area seen in the fourth quarter last year and the first quarter of this year. So was the rebound merely a test of the breakdown level or the start of a more meaningful rebound? It is still difficult to say but we should get a better idea by seeing how well prices hold up over the rest of the week. The path of least resistance remains to the downside on the weekly chart (not shown) so the market remains vulnerable but this rally may well prompt more short-covering. Given how washed out the gold market has been, there may be considerably more room on the upside. The stochastics had shot higher, suggesting good buying interest – they are now correcting. Macro factors The volatility in China’s equity markets and the contagion across other markets suggest a major change in sentiment that is causing investors to rethink. This is leading to significant deliveraging. The yuan devaluation has increased currency tensions in Asia and the threat of further competitive currency devaluation has prompted renewed interest in gold. This pullback in gold prices seems reasonable – the rally has been relatively strong so nervous profit-taking is not surprising, especially considering gold’s behaviour in recent quarters. With emerging market currencies weakening, perhaps gold’s attributes as a non-fiat currency may appeal to investors once again.  Gold has been out of favour for a long time – its peak was in September 2011, almost four years ago. The better times in other markets since then has meant there was less need for gold as an investment safety net but perhaps it is time for gold to play a role again.  Chinese equity markets have been in freefall – the CSI 300 has fallen 43 percent since its June high. The volatility may well mean retail investors may not flock back to the equity markets once this sell-off has run its course – so more household spending may return to buying more traditional items such as household goods and vehicles and more traditional investments such as jewellery. If the yuan is devalued further, demand for gold could also pick up. The net long fund position on Comex climbed 9,217 contracts last week, with 11,283 lots of short-covering offset by 2,066 contracts of long liquidation. The gross short position remains high so further short-covering seems likely. Conclusion China’s currency devaluation seems to have been the catalyst for causing investors to rethink, deleverage and take profits. The corrections are causing a lot of uncertainty and fear, which are often good for gold – especially a downtrodden gold. We would not be surprised if there were more room on the upside for gold considering the size of the gross short position. All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.

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