Last week’s early sell-off spooked Gold Bulls not just because price broke 1,300 round figure support. But rather, bulls were scared as there were niggling suspicions that institutional funds were clearing their long positions due to unexplained sudden dip in prices. Prices hit a low of around 1,273 USD per troy ounce on Wednesday, before pushing back to end the week at 1,314.50 USD per oz, not able to break the week’s high but nonetheless ending the week back in black, higher than last Monday’s open of 1,312.
This reason for this reverse in fortunes came to light on Friday, when CFTC released its weekly Commitment of Traders Report (see graph below). Latest figures (based on 6th August data) showed a sharp increase in Net Non-Commercial Long Positioning – amounting to 23,269 contracts. This is highly interesting as 6th August was the day prices actually dipped below 1,300, suggesting that we are seeing strong speculative purchases by institutional buyers (e.g. funds). Price did not immediately bounce higher, but the reversal certainly is no fluke, and is likely driven by the increase in non-commercial purchases for the rest of the week.
This assertion is vindicated this morning, where Gold prices gap higher and continued trading higher on open. As COT numbers are only released after market has closed, it is clear that this increase can be attributed to the rest of the market following the lead of institutional traders. Considering that last Friday’s data is lagging, a good way to confirm that Funds are indeed buying gold in huge bulk can be confirmed by looking at this Friday’s COT data, which should reflect an equal or if not larger gain in Net-Long positioning to account for the actual price reversal last week. If we do not see a significant increase in Net-Long positioning this Friday, this may imply that the Funds that have bought Gold from sub 1,300 may have cleared their positions above 1,300 once again. This would suggest that price may not be able to sustain long-term gains, and a move back below 1,300 may be possible despite current strong uptrend.
From a technical perspective, Stochastic readings are currently within Overbought region, and a temporary pullback may be possible. This is made even more likely if we consider that current price has pulled far away from the ascending trendline, and a corrective action may occur.
Looking from a longer-termed perspective, even though prices has broken away from the descending trendline (blue dotted), rallies may still be capped by the 1,350 resistance and descending Channel Bottom even if prices managed to clear the 1,350 mark. Stochastic readings are still pointing higher, but that may be a red herring as gradient of current Stoch curve is lower with difference between Stoch/Signal lines narrowing, suggesting that a Stoch peak my occur soon just as readings hits the 50.0 mark.
All in all, technicals support a pullback towards the downside for both Short-term and Long-term charts, which is to be expected given Gold’s extreme bearishness. Hence, this week’s confirmation of Funds purchases via COT numbers becomes all the more important in order for a longer-term bullish move to take root.