Article / 07 September 2016 at 13:25 GMT

Gold surges as hawkish talk gives way to recession fears

Head of Commodity Strategy / Saxo Bank
  • Soft US data boost gold, weaken dollar
  • Gold bounce the largest since Brexit vote
  • $1,385-95/oz the key upside level for XAU

The dollar's loss is gold's gain as US data head south. Photo: iStock

By Ole Hansen

Gold has surged higher following a double dose of weaker US data. The big miss on ISM non-manufacturing yesterday surprised not only the market but also the Federal Open Market Committee who have been talking up the prospects of higher rates. 

Instead of rising rates the market could begin focusing on a gold-supportive recession instead.

The battle at $1,300/oz last week was won by the bulls once the US job report printed a lower-than-expected number. This was followed by the lowest non-manufacturing ISM reading in six years yesterday. 

This combination of events was the shock that the gold market needed to get back into gear, and the yellow metal jumped the most since the Brexit vote on June 23. Not only have these two data points reduced the need for a September rate hike, but they also helped weaken the dollar.

Lower US dollar and US real yields have been two major drivers behind the gold surge witnessed this year. 

Gold drivers

From a technical perspective, gold once again "only" managed to correct by 38.2% of the latest rally. Back in May the correction was halted at $1,200/oz, which represented a 38.2% retracement of the rally from the December low to the May 2 peak at $1,304/oz. 

This time around, support was found at $1,305/oz and once again, the retracement from the post-Brexit high amounted to 38.2%.

Spot gold with retracement levels

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Source: Saxo Bank

A correction of this magnitude is considered to be a shallow correction within a strong trend and that sends a signal that the rally is not over yet. 

From a technical perspective, the attention is now turning to $1,355/oz – the trendline from the June high – and more importantly the $1,385-95/oz area. A break through here would take out the June high, the 2014 high, and extend the recovery of the 2011-14 selloff beyond 38.2%

Spot gold with retracement levels
Source: Saxo Bank
ETP investors are once again accumulating gold holdings after the biggest two-day reduction so far this year last Thursday.

ETP holdings and gold

Hedge funds reduced the net-long by another 10% in the week to August 30. The position at 238,152 lots remains elevated from a historical perspective but as long key support levels continue to hold, funds would see no reason to make any major reductions.
Speculative positioning in COMEX Gold futures

— Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank 
SierraPt. SierraPt.
You still hold GDX short in Saxo Model Portfolio?
AlexF AlexF
they sold it yesterday or day before
Ole Hansen Ole Hansen
@SierraPt. Yes still holding the short 130/132 call spread after taking profit on the put while we were testing support. The time decay on this trade is going to accelerate as we move closer to expiry on Sept. 30. and that make us hold onto the trade for now. But we are keeping a close eye on developments considering the increased risk of an upside extension.
SierraPt. SierraPt.
Thanks, Alex!
Ole Hansen Ole Hansen
Hi AlexF and SierraPt. I just realised. The short GDX at 29.72 from Aug 23 in the Saxo Model Portfolio is still open.
SierraPt. SierraPt.
Thank you!


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