By Vatsal Srivastava,
The futures contracts for August delivery in the COMEX gold in the New York commodities exchange was trading at a 15-week low of $1,265 per ounce, down $25 from its open. There was no fundamental news flow pertaining to the yellow metal itself as bears took over.
The only explanation for the sell off would be the US equity markets at all time high as investors are growing more confident about the prospects of a sustained economic recovery.
This naturally leads to money moving out of safe haven assets such as gold. According to Bloomberg data, investors cut their long positions on gold for a second straight week, to 90,358 contracts as of May 20.
Further, the yellow metal’s 30-day volatility dropped last week to the lowest in more than a year. Holdings in global exchange-traded products (ETPs) backed by gold are the smallest since 2009. In 2013, more than $73 billion was erased from global ETPs.
On the technical charts of the August futures contract, gold does seem heavily oversold on the daily basis. The Relative Strength Index (RSI) is almost touching 30, which indicated an oversold territory.
The last candlestick has broken fiercely through the lower Bollinger Band, which again can be treated as a contrarian bullish indicator. We may see a small sharp rebound for the remainder of the week, but the prudent strategy is to remain a seller in gold. The major price resistance is $1325 per ounce, a level from which the yellow metal has given up gains in the last few months.
However, there is one risk to short gold trade. The bond market is telling us that the Federal Reserve guidance on interest rate hikes will not play out as they are currently anticipating.
We can gauge this by looking at US ten year yields and the US Dollar Index, which have failed to rally despite the central bank cutting back on its monthly purchases of bonds and mortgage backed securities by $10 billion a month for four consecutive meetings.
While the US central bank has not specified exactly when the first rate hike will be, according to their official forecasts, the main interest rate is expected to reach 1 percent by the end of 2015 according to BK Asset Management. Although this is not an aggressively hawkish forecast, investors believe the central bank will be even more cautious as Quantitative Easing draws to close.
The market is pricing in only about 50bp of tightening by the end of next year according to BK Asset Management. If this scenario plays out, real interest rates – one of the major determinants of the gold price – will also rise in a mild manner.
This was not the prevailing view last year when there was a fear of a 1994-style bond market turbulence which led to the precious metal losing 28 percent of its value.
Gold is making lower tops with lower bottoms as the global macro recovery continues. Even if one is not a long term bear on gold and does seek protection against inflation and systemic risk in the financial system, chances are that one would get a better entry point at lower levels in the coming months.
(Vatsal Srivastava is consulting editor for currencies and commodities with IANS. The views expressed are personal. He can be reached at [email protected])