By Ole Hansen, Head of Commodity Strategy at Saxo
 Ole Hansen |
Gold’s short-term technical outlook deteriorated towards the end of last week after the FOMC-led rally to a fresh cycle high, and near resistance at $1963, was replaced by a sharp reversal as the dollar strengthened, especially against the euro following a dovish rate hike from the ECB. The turnaround in the dollar highlights how gold continues to track broader USD trends. Gold’s sell off was extended following a very strong US job report, thereby further weakening the short term technical outlook with Thursday’s bearish engulfing candle on the daily chart pointing to a temporary top in the market.
Gold company ETFs see mounting inflows while bullion-backed lingers
An interesting divergence between ETFs that tracks mining companies and those tracking the actual price of bullion has emerged following gold’s increased popularity since the November low. Gold companies and ETFs tracking the major miners are getting more popular among investors, as the gold price has gained 17% from its cycle low, with the outlook possibly set to improve further if central banks eventually ease interest rates. Historically, gold has rallied strongly when the Fed pauses and cuts interest rates and together with strong underlying demand from central banks, the market is pre-empting the Fed’s expected turn to easing. The largest gold miner ETF fund VanEck Gold Miners ETF (GLD) has seen inflows rise 400%, suggesting retail investors are increasing their positions. Other popular gold ETFs so far this year include iShares Gold Producer UCITS ETF (IAUP) and iShares MSCI Global Metals and Mining Producers ETF (PICK) with inflows into those ETFs rising over 100% this year.
These significant inflows have occurred at a time when total holdings in bullion-backed ETFs have seen no pick-up – with total holdings still lingering near a three-year low. This potentially confirms that recent gold strength has been driven more by actual physical demand than so-called paper demand. An observation also supported by the fact that the aggregate open interest across COMEX futures has dropped to a November 21 low at 468,000 contracts. In other words, we have seen no significant pick-up in open interest despite the mentioned strong rally.
Gold’s rollercoaster ride this past week has, from a technical perspective, raised the prospect of a long overdue correction. Technical traders will have turned more negative following Thursday’s bearish-engulfing candle, while a close below the 21-day moving average – currently at $1914 – would signal some additional loss of momentum. A close below could see a short-term reversal lower towards $1872, or even $1845.
