A look at gold prices shows that bears are in control in the short term. The US non-farm payroll data, released on June 1, came in better than expected.
That gave bears a chance to assert their dominance.
Gold on Comex is being held down by the 200-day moving average (DMA) and short-term down trendline.
The metal needs to break that trendline and the DMA to start the upmove as shown on the chart.
On a weekly basis, gold has major support at the trendline of around $ 1,280 and 200-DMA at that level.
Not all hopes are lost though. Agreed, in the short term, gold looks vulnerable. But there are certain data which suggest that a rally is coming. First is the FOMC fuse. There is a good chance that the Fed would raise interest rate by 0.25 per cent at its next meeting on June 13.
Historically, gold has rallied five times out of six when the Fed raised interest rates. For now, it has a handy checklist ahead of the Federal Reserve meet. One variable is selloff in gold prices before going into the event. We have already seen price correcting from $ 1,365 to $ 1,290. Second is the dollar going higher in anticipation of a rate hike. That is also checked. The dollar index is in an overbought position.
In addition, crisis in Italy and Spain is deepening. There are heightened expectations that the contagion in Europe may spread. Which means the FOMC may halt its rate hike as the US is the only developed economy tightening its monetary policy. Europe, Britain and Japan have dropped no hint of any such action. The drop in 2-year US Treasury yield is a pointer to that. If US rates are not hiked, gold will soar on the news. If the rates move up, gold too will see some relief rally.
Another leading indicator is the Gold Daily Sentiment index and money managers’ open interest in gold futures. Here is the chart of money managers’ position on gold. Right now, their net short is lowest since January 19, 2016. Commercial net short is lowest since February 2016. The chart shows how gold tends to rally from relative low levels of open interest.
The Gold Daily Sentiment Index has predicted every trough and peak in gold since December 2015. It’s trading below 21-day moving average, which suggests that a rally is round the corner.
(Source: Sprott Money)
To sum up, the data point to a rally in gold to $ 1,350-$ 1,360 either near or after the FOMC meeting on June 13. Based on data points like a fall in Gold Daily Sentiment Index, open interest and the dollar, chances for gold rally have improved. The only quandary for precious metal is a surge in DXY or US Treasury bond yields or a surprisingly hawkish Fed forecast.
(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry. Readers are advised to consult their financial advisers before taking any position based on these observations)