Gold Gets Safe Haven Bids But COMEX Has Stopping Power

by Taki, Gold Silver Worlds

This article is part of a series of in-depth market analyses for gold investors. Our aim is to publish this type of analysis on a weekly basis. It is not meant to be investment advice, but it should provide precious metals investors key insights which can be helpful in their decision making.

Our focus is on chart analysis. With an average of 12 charts per article, we will cover not only gold charts but also intermarket analysis. It is our core belief that all financial assets, including gold and silver, attract bids relative to the (perceived) value of other financial assets. In other words, the attractiveness of gold is not only influenced by “internal” factors within the gold market but also by “external factors” like stocks, bonds, commodities, currencies. Makes sense probably, but a thorough and objective analysis is mandatory to identify intermarket influences.

The reason we rely on charts is that it is the best way to remain objective. We do not rely on news stories, for sure not in the financial media, because the authors have the tendency to match a story with a price movement. It is always possible to detect an event or news story which logically “explains” the change of the price of gold. We believe the value of stories is mostly useless, and only creates “noise” for investors.

Gold charts: trend lines and patterns

We start our weekly review with several gold price charts. The aim is to identify basic chart patterns, trend lines and check the very basic technical indicators (i.e., relative strength index RSI and moving averages indicator MACD).

The daily gold price chart has a huge resistance zone in the $1300 – $1320 area, as indicated by the green bar on the first chart. Throughout 2014, the price of gold has been hovering around that area, before breaking down in September. Gold is currently attempting to break through resistance, and close the bearish gap.

Technical indicators on the daily chart suggest a break is underway in the short run.

gold_price_daily_30_January_2015

From a chart perspective, the importance of the $1300 – $1320 resistance area is determined by its duration and the number of attempts to break through it. Both insights can only be identified on the weekly and monthly charts.

The weekly gold price chart carries several insights. First, the importance of the key resistance area seems to date back to (at least) May 2013. Also, it appears it is the fourth attempt of gold to break through that area, adding value to its importance.

The technical indicators on the weekly are more constructive than on the daily chart. The momentum indicator RSI shows that gold has not traded above the current reading for more than two years. In simple terms, it confirms the importance of the resistance area on the price chart. The moving averages indicator MACD is about to turn positive (a reading above 0). That is undoubtedly very constructive.

gold_price_weekly_30_January_2015

The monthly chart carries quite some insights. First, it indicates the huge importance of the $1200 area, marked with the horizontal green line, because it dates back to 2009 (when it was resistance) and 2010 (when broken resistance became support). Second, gold recently bounced off an ascending trendline going back to 2006, which is the other green trendline on the chart. What’s more, both trendlines are forming a triangle, which mark a “make or break” area.

A healthy indicator is the uptake in volume with the recent price rally. Also, the RSI is moving nicely higher while the short term moving average is about to cross the longer term moving average, surely a constructive evolution. However, note how the MACD is still way below 0, which indicates more work is required before confirming a bullish uptrend.

gold_price_monthly_30_January_2015

Most investors are used to look at gold in US Dollars. However, it is equally important to monitor gold in other major currencies. The next chart shows the one-year gold price in 6 major currencies. Clearly, and unsurprisingly, gold in US Dollars is the weakest performer. Gold in Euros, Japanese Yens, British Pounds, and Canadian Dollars is up substantially. Although not visible on any chart in this article, we can reassure readers that gold has broken out in those currencies. This simply confirms the exceptional strength of the US Dollar rally which started last summer.

gold_currencies_Jan2015

Gold futures positions in COMEX

As explained many times before, the gold and silver price are set in the futures market (COMEX), just like most other commodities and currencies. The weekly Commitment of Traders report (COT) reveals the positions of the key participants, mainly commercials and non-commercials. The chart below shows the current positions of commercials and non-commercial traders in the gold market with the blue and red bars (center of the chart).

The positions of large traders in COMEX gold and silver, as reported by the Commitment of Traders report (COT), have changed quickly in the last couple of weeks, as seen on the next chart. The key takeaway of the chart is the pace of change of the short positions of commercials during each price rally, as marked by the red rectangles. The faster the commercials accumulate short positions during a price rally, the higher the chance that the rally will be short-lived.

As indicated with the red rectangles, a sudden spike in short positions of commercials has the “stopping power” to cap a rally. Unfortunately for gold bulls, the last couple of weeks there was a significant spike in commercial shorts. That does not bode well for the price of gold in the short run. Mind that the COT report is not a perfect timing tool, so “inevitable” does not equal “imminent.”

gold_COT_30_january_2015

Sentiment: gold optimism index

Along with the change of the gold price price, it is useful to monitor how sentiment changes. The next chart shows the gold price (upper part of the chart) and the optimism towards gold (lower part). As on most charts, 80% of the data points are “noise”, so it is important to focus on the 20% which carry important information. In this case, the extreme optimism readings are of great importance. Why? Because in the last two years, optimism has been “capped” consistently around the 50 area, as evidenced by the green dotted lines. Not coincidentally, those extreme readings coincided with an intermediate top in the gold price.

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