Gold Challenging Resistance as Equities Drop

Gold is once again challenging resistance between $1,289/oz and $1,292/oz as weaker stocks, rising volatility and a softer dollar, especially against the Japanese yen, have triggered renewed demand. The uptick in gold is a reflection of the broader volatility caused by the latest breakdown in China-US trade negotiations.

Gold is once again challenging resistance between $1,289 and $1,292/oz, as highlighted on the chart below. The combination of weaker stocks, rising volatility and a softer dollar – especially against the Japanese yen – have triggered renewed demand. This comes as uncertainty about what happens next in the trade talks between China and the US rumbles on.

A break above the aforementioned area of resistance could see gold challenge Fibonacci resistance at $1297 followed by $1,306/oz. Only a break above $1,316/oz would signal a renewed challenge of the February peak.

Central bank buying continues

China bought gold for a fifth consecutive month in April. The 61.1 million-ounce increase was the largest since 2016 and it took the year-to-April total to 57.9 million. As I said in an interview with Bloomberg yesterday: “banks’ buying is the underlying demand story which continues to develop from central banks seeking to de-dollarise their reserves […] what is missing for gold to move higher is a pickup in paper demand through futures and ETFs. Something that will happen if stocks run into a prolonged period of profit-taking and/or the dollar stabilises”.

Paper demand the missing link

Until now, paper demand has been mostly negative with total holdings in bullion-backed ETFs having seen continued reductions this year. This is in line with the continued rise in stocks, which reduced the need for safe-haven buying and diversification. Hedge funds, who are much more price-sensitive, chased the market during this period; in the week to April 30. gold was bought to the tune of 33k lots, making it the second-biggest week of buying this year.

The move returned the position to a net-long and highlighted the continued struggle for direction. However, a break to the upside would force another round of buying from momentum and technical trading funds as they are forced to rebuild a bullish exposure to the market.

Keep an eye on volatility

As I highlighted in Peter’s e-mailed update yesterday, it is important to keep an eye on the VIX index. The May future jumped above 17% yesterday and that resulted in more than half of the record short position (180k lots on April 30) moving into loss-making territory. With the net-short representing 40% of the total open interest of the futures contract versus 26% during the last peak, the market has been left exposed to additional short-covering if the uncertainty rises further.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire.