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Gold Prices Charge Multi-Year Highs, Ignore Contrarian Sentiment Signals

Gold Prices Charge Multi-Year Highs, Ignore Contrarian Sentiment Signals

John Kicklighter, Chief Strategist

Gold Prices Talking Points:

Technical Forecast for Gold: Bullish

With headlines of a refreshed trade war that in turn shook the financial markets and traditional currencies, it was perhaps no surprise that gold would catch a bid this past week. While this is a technical evaluation of the precious metal, we cannot tune out the systemic ‘fundamental’ influences at play as they are playing a critical role in overcoming serious resistance to trend still present with most assets. For gold, the best means of establishing the technical view of why momentum can sustain itself is the collective depreciation of the benchmark fiat currencies. If the Dollar, Euro, Pound and Yen are all under pressure – difficult to see as they are priced relative to each other in most cases – where does capital go? This precious metal.

Taking stock of the technical picture of gold, it is difficult to get a good handle on its standing through a daily chart. That is owing to the fact that it has climbed 30 percent in a fairly steady clip over the past 12 months with a few pace alterations here and there. That past week offered up some material progress however with a charge that cleared out July resistance around 1,450 for a remarkably impressive one-week charge. On this time frame, the bigger technical barriers are not readily visible. That lack of readily-available boundaries leads to greater dispute over what truly stands as meaningful resistance. And, if there isn’t a strong consensus, it can be difficult to hold back the tide to spark a reversal – but it can also deflate the potential of breakout pressure to keep an accelerated pace of follow through. In the absence of easy-to-discern levels, I will refer to measures of momentum. Below is the 50-day momentum – at a 10-year high – but shorter-term measures are also important to consult.

Chart of Gold with 50-Day Momentum Indicator (Daily)

Gold Price Chart .

Chart created with the TradingView Charting Platform

Before looking at the higher time frame for the weighty levels to emphasize moving forward, first a look to a short-term picture. In a familiar pattern (for the markets and not just gold), we have seen the aggressive charge this past Monday through Wednesday resolve in another well-tracked consolidation pattern through the second half of the week. The upper boundary on this recently developed wedge stands at 1,510 and support is roughly 1,495. A path of least resistance break would be a bearish move that covers back into some of the opened range. Meaningful support is at least more overt on time frames as low as this one. The previous range high at 1,450 is the next hefty floor and the 1,400 figure marking the backbone for much of July would be another large barrier.

Chart of Gold (4 Hour)

Gold 4-Hour Price Chart

Now, moving up to the higher time frame, we can start to appreciate where some of the serious resistance can be found. There is a previous precedence of market hesitation around 1,540/25 which stood as volatile support between July 2011 and March 2013 before the metal suffered an expedited stumble through a few flash crashes – including one back in April 2013. There is also a technical boundary that can be pulled in the 61.8 percent Fib retracement of the 2012 to 2015 bear wave just above 1,510, but that won’t count nearly as much as the state of momentum. In other words, unless momentum flags naturally, there isn’t much in the way of overhead to cap any immediate bullish interests.

Chart of Gold with 1-Week Rate of Change (Weekly)

Gold 1-Week Rate of Change Chart

As I mentioned above, gold is proving capable to override a general restriction against meaningful trends else where in the capital and commodity market because of its direct contrast to some of the most battered assets given our fundamental backdrop of competitive economic policies and renewed stimulus waves: currencies. When we price the metal versus the four most heavily used currencies in the FX market (Dollar, Euro, Pound, Yen in equal proportion), we are left with the chart below. On this perspective, gold is still trading at a six-year high, but it is much closer to the record high set during the height of appetite during 2011. As we have seen with the likes of the S&P 500 and Dow, the proximity of record highs can redouble momentum. Also interesting on this measure, this past week’s rally was the best since February 2016.

Chart of Equally-Weighted Gold Index with 1-Week ROC (Weekly)

Equally-Weighted Gold Index Chart

A further statement to the momentum of the metal outside any complicating interpretations of the Dollar, we see below the performance of consecutive weekly runs. As it happens, this past week notched the bullish tally to a 12th straight advance which matches a stretch through 2007 for the record. On this basis, we can see the speculative debate over the importance of momentum versus the influence of disputed range highs from over half a decade ago.

Chart of Equally-Weighted Gold Index with Consecutive Candle Count (Weekly)

Another reason to put greater emphasis on momentum over market barriers is to be found in the chart below overlaying the CBOE’s gold volatility index on the metal itself. The activity measure rose its highest level since late 2016. It is unusual to see assets that are positively correlated to their derivative volatility measures – Treasuries and sometimes the Dollar also populate this short list – but this commodity is perhaps the most prominent. So long as risk continues to hover at higher levels, there is only greater impetus to keep the spot propped.

Chart of Gold and Gold Volatility Index from CBOE (Weekly)

Gold and Gold Volatility Price Chart

A bonus chart to consider for this week is based on the resurgence of silver. Gold and silver are bedfellows in a general sense with the latter representing a cheaper option to the former. However, it is gold that carries the true haven status while silver is more of the speculative play. That is perhaps why the ratio of the two climbed to a 25-year high this year. That said, there has recently been a strong pullback in the ratio – though it is small in comparison to the long build up. From an arbitrage trader’s eye, this may seem a reversal play, but for the straight view of gold, a rally in the cheaper vehicle to gold reinforces the sense of its demand.

Chart of Gold to Silver Ratio (Monthly)

Gold to Silver Ratio Chart

With such an aggressive move – especially in a world were so few example of persistence exist – it is not a surprise to see speculative positioning leaning into extreme readings. The push against the bullish climb is discernible but not nearly as extreme in retail (CFD) interest. In fact, we can see in the IGCS reading that net interest is still 60 percent long – not surprising as this exposure is almost always leaning long – but it isn’t even as low in this skew as the mid-June standing before it launched higher. From futures, the exposure is far more aggressive. Net speculative positioning is nearing 300,000 contracts favoring a long view which is closing in on the record bullish readings from 2016. Even if the balance hits a fresh record imbalance, I would not consider it an imminent reversal signal.

See how retail traders are positioned in Gold along with other key FX pairs, indices and oil on the DailyFX Sentiment page.

Chart of Net Speculative Positioning in Aggregate Dollar Futures from CFTC Report (Weekly)

Speculative Positioning Chart

Chart of Retail Trader Positioning from IG Clients (Daily)

Spot Gold Client Positioning Chart

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.