Article / 02 June 2016 at 14:00 GMT

After weak May for gold, what lies ahead in June?

Head of Commodity Strategy / Saxo Bank
  • Gold had a poor month in May, giving back a third of is December-May 3 rally
  • 8% top-to-bottom correction driven by readjustment of US rate-hike expectations
  • Hedge funds reduced exposure in May; ETF investors were continuous buyers
  • Trend in the market is to buy intrend of buying into weakness
  • Gold has found support at $1,205/oz, first critical support before $1,175 and $1,145
  • A break back above $1,224/oz would be first sign a bottom has been established

Gold and dollar banknote
 Gold's price correction was primarily driven by a resetting of expecations 
for US interest rates. Image: iStock

By Ole Hansen

Gold was weak throughout May, with the yellow metal giving back just over one-third of the rally that was seen between the lows last December up until May 3. The near 8% top-to-bottom correction was primarily driven by the readjustment in expectations for when and by how much US interest rates would have to rise. 

These upwardly revised expectations also helped the dollar recover, thereby putting some additional downward pressure on metals, both previous and industrial. Another characteristic observed during May was divergence among investors using different investment vehicles.

Hedge funds had been non-stop buyers throughout the first four months after getting caught short at the beginning of the year. This buying spree culminated during the first week of May when the price hit a 15-month high above $1,300/oz. During that week alone the net-long futures position held by these investors rose 27%, with most of the buying taking place above $1,250/oz. 

While hedge funds reduced exposure, another investment group could not get enough: investors using exchange-traded funds (ETFs) were continuous buyers throughout May. And while the price of gold retraced, total holdings rose by 88 tonnes or 5% to a 2.5-year high, according to Bloomberg. 

Gold ETP holdings
The trend of buying into weakness has so far been repeated during the first couple of trading days this month. That indicates that long-term investors, who are less price-sensitive, have been using the weakness to accumulate gold during the past month. 

June will present plenty of event risk for traders to navigate through. First up is the monthly US jobs report on Friday, followed by a comments from Fed chief Janet Yellen on Monday. Both of these events lead up to the June 14-15 FOMC meeting and the raised potential of the rate hike cycle being resumed. 

A week later the UK's Brexit vote will take place on June 23 and, with current polls showing no clear lead, this could become a cliffhanger, and most find it difficult to decipher the market reaction in the event of the "Leave" side winning. 

With these events in mind, it can be argued that both gold bulls and bears have something to latch on to over the coming weeks. How much of a June rate hike has been priced in, and how will the dollar react to the outcome? 

From a technical perspective, gold has so far found support at $1,205/oz, the first critical support level ahead of $1,175 and $1,145. Meanwhile a break back above $1224/oz would be the first sign of a bottom having been established and finally confirmed on a move above $1239/oz. These levels are all based on Fibonacci which have provided good guidance in recent weeks and months. 

XAUUSD - Gold has found support at $1,205/oz
Spot gold with retracement levels Source: SaxoTraderGO

— Edited by John Acher

Ole Hansen is head of commodity strategy at Saxo Bank. His Twitter account was cited by MarketWatch as one that investors should follow in 2016.


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