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Article / 04 October 2016 at 13:21 GMT

Gold back below $1,300/oz as confidence fades

Head of Commodity Strategy / Saxo Bank
Denmark
  • Gold breaks $1,300/oz support level
  • 'Back to the drawing board' for bulls
  • Downside risk to $1,250 remains

XAUUSD
All that glitters: Gold traders send the yellow metal down below $1,300/oz today, but it remains to be seen whether this is a blip or the start of something bigger. Photo: iStock

By Ole Hansen

Gold has broken below the key line of support at $1300/oz. A test of this, the lowest level since the day of the Brexit result has been under way for some time now following the failure to break higher in response to price-friendly news.

Traded volume on the COMEX futures exchange jumped on the break below $1300/oz:
Comex gold future
 Source: Bloomberg

Having traded sideways for the past three months and after failing to mount a strong challenge at multi-year resistance around $1,380/oz, it is now back to the drawing board. As we have just entered the final quarter following a 20% rally this year, it is now the short- to medium-term direction of the yellow metal that is going to be determined. 

In our Q4 outlook released earlier this week, Saxo Bank chief economist Steen Jakobsen
highlighted the short-term risk to precious metals from a stronger dollar. It is indeed the stronger dollar – particularly in light of its breaking the down trend versus the Japanese yen – which helped push gold over the edge today.

Back in May, the correction from $1,300 to $1,200/oz was driven by a 33% reduction in bullish bets held by hedge funds in the futures market. During the same month, longer-term investors through exchange-traded products bought into the weakness and this eventually helped stabilise the market following a 38.2% correction of the rally seen up until then. 

ETP holdings and gold

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Hedge funds increased bullish bets by 20% in the week to September 27 to 261,892 lots, some 12% above the peak position witnessed before the reduction seen in May. ETP investors have maintained near-steady holdings during the past two months, although a small uptick in demand has been witnessed during the weakness seen these past six days. 


Speculative positioning in COMEX Gold futures
 
We maintain a constructive longer-term view on gold but the risk of a stronger dollar will create a challenge to XAUUSD with XAUEUR and XAUJPY potentially being the better performers. The gold market, it must be noted, hates the uncertainty surrounding the Federal Open Market Committee's rate hike intentions. Following better-than-expected economic data from the US this past week, the chances of a December hike continue to rise. 

The negative bond yield environment, the US presidential election, and very low US real rates are likely to attract continued demand for gold – but not before we get a sense of how deep this correction is going to be. A quick jump and close back above $1,300/oz could be the first indication that pent-up demand has been triggered and this should help stabilise the market.

From a technical perspective, however, the downside risk – initially to $1,280 and more importantly $1,250/oz (38.2% of the December to July rally) – can not be ruled out. For the market to have enough momentum to break $1,380/oz, a correction was needed. 

The main question now remains whether this is just a correction or something larger. 

Spot gold with retracement levels
Source: Saxo Bank
 

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank

04 October
matsuri matsuri
dollar is stronger so why is oil price going up?
04 October
Ole Hansen Ole Hansen
Russian Energy Minister Novak states that Russia and Saudi Arabia
are to set output meeting date soon
04 October
Bullionaire Bullionaire
That last line...!!!
04 October
matsuri matsuri
Russia and Saudis are producing at record levels so even if they freeze od decrease slightly output it will not change the fundamentals, but the market will buy it anyway.
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