Article / 24 August 2016 at 9:16 GMT

Gold remains stuck in no man's land ahead of Jackson Hole

Head of Commodity Strategy / Saxo Bank
  • Gold stuck in a rut in the wake of the Brexit-inspired surge
  • Gold magnetically attracted to its $1,340/oz average price
  • Fundamental drivers are intact but warning lights starting to flash

 The vast policy experiment known as QE is helping support the gold price. Pic: iStock

By Ole Hansen

Since the post-Brexit surge gold has increasingly found it difficult to make any decisive move in either direction. During this time, the price of gold has been averaging $1,340/oz, a level that has been touched in 12 out of the last 14 trading days. 

While the underlying fundamental drivers remain intact this may still turn out to be a sideways correction following the post-Brexit surge. Some warning lights have, however, started to flash which could indicate that gold, just like in May, could be facing another correction. 

Total holdings in exchange-traded products backed by gold have seen limited change for the past few weeks while hedge funds have been net-sellers in five out of the past six weeks. Despite this, gold has nevertheless managed to stay range bound with other drivers providing support. 

Gold investments through futures and ETP
Market risk appetite remains elevated courtesy of the biggest central bank experiment in the history of finance. Liquidity continue to search for a home and with an increased amount of sovereign bonds trading at very low or negative yields these funds have flowed into higher yielding currencies and out of the dollar. The weaker dollar has so far helped offset the adverse impact of a rising stock market and slightly higher US bond real bond yields ahead of the Jackson Hole speech by Fed chair Janet Yellen on Friday. 

Gold drivers
 Source: Bloomberg, Saxo Bank

The options market, seen through the lens of the SPDR Gold Trust (GLD), the world's largest gold ETF, sways heavily towards the bull camp. During the past week nine out of the ten most traded options strikes on GLD were calls. This could be a reflection of the current stalemate and rising correction risk in the market. Investors are therefore using options to have the exposure should it pop higher while at the same time maintaining the opportunity of picking up the ETF cheaper following a correction. 

Gold has been trading sideways for the past two months with the range continuing to decline. Fundamentals support further upside but investment flows could indicate a deeper correction may be needed in the short term. 

The band of support between $1300 and $1315 needs to hold in order to avoid an exodus from hedge funds similar to what we saw back in May. 

Spot gold with retracement levels
Source: SaxoTraderGO

– Edited by Clare MacCarthy

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.

Ole Hansen Ole Hansen
As the dollar once again attempt to strengthen gold once again come under pressure. Silver getting close to having retraced half of the 33% rally from June to July.
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