The start of this trading week saw a slew of strong macro releases with both European and US PMI readings surprising to the upside.
Article / 09 August 2016 at 10:47 GMT

Gold ruled by external drivers amid holiday lull

Head of Commodity Strategy / Saxo Bank
  • Short-term traders happy to play tight range 
  • Outside drivers like yields and USD to determine direction
  • Bullish case for gold remains as long as yields are very low
 Gold, as ever, is highly sensitive to the vagaries of the dollar. Pic: iStock

By Ole Hansen

Gold has traded very quietly so far this week with short-term traders happy to play the tight range established after the selloff last Friday. The stronger-than-expected US job report last Friday halted the latest attempt to extend what have already been a significant rally so far this year. 

While dovish actions from several central bank continue to attract demand from real money investors the continued and strong job generation in the US has prevented gold from breaking higher at this stage. With the peak summer holiday season being upon us activity is expected to slow down with the direction increasingly being determined by outside drivers such as yields and the dollar. 

Gold dropped on Friday as bond yields and the dollar both rose in response to the stronger-than-expected US job report.
Gold drivers
Demand for exchange-traded products backed by gold picked up during the past couple of weeks after stabilising in the aftermath of the Brexit vote. Total holdings according to Bloomberg have risen by 574 tonnes or 40% so far this year. The bullish case for gold remains intact as long demand from investors seeking alternatives to low or negative bond yields persists. 

Gold ETP holdings
Continued demand for ETPs was seen during the May selloff which was led by hedge funds scaling back a record net-long futures position. This helped establish the floor at $1,200/oz from where the rally before and after the Brexit vote continued. 

Speculative positioning in COMEX Gold futures

Gold has found some support at $1,330/oz but the combination of the failure to reach a new high last week and the break below trendline support (blue line) has increased the risk of a deeper correction towards the $1,310 to $1,315 area. 

Spot Gold
 Source: Saxo Bank

– 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.


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