Gold continue to climb higher in recent days even as reports of lower demand continue to emerge. Yesterday we have reports coming in stating that John Paulson has cut has SPDR Gold Trust stake by more than 50%. This is highly interesting as Paulson has been telling investors as recently as July that they should continue to hold onto their gold positions, when other high profile investors such as George Soros and Daniel Loeb have been spotted clearing their SPDR Gold positions. On the non-speculative front, physical demand of gold around the globe fell to a four-year low in Q2 2013, falling 12% Y/Y despite a rise of 71% in demand from India and 87% jump from China, mostly due to low prices attracting small buyers across both nations. The decline in global physical demand of gold appears to be spearheaded by Central Banks finding less need to diversify their reserves considering that USD strength is gaining back.
That apparently is not daunting for hedge funds and other institutional investors that have bought in gold based on COT number last Friday. Hedge funds have been spotted buying gold aggressively around 1,200, and it seems that the trend is continuing when prices are dipped below 1,300 last week. In order for us to have a better idea of the sustainability of current bull run, COT numbers released later today should ideally reflect yet another increase in Net-Long Non-Commercial positions. Failure to do so suggest that current rally is not supported by proper demand, and will possibly fall down hard in the future.
Looking at short-term chart, price action does not seem to suggest that rally is overstretched or built on thin air. We did see some consolidation between 1,315 – 1,345 for most part of the week, suggesting that bulls were able to rebuff some degree of setbacks, adding credence to the bullish rally. The main thrust yesterday which managed to break the 1,345 ceiling wasn’t without merit either. US stock markets tanked with Dow Jones Industrial Averages closing more than 200 points lower, the 2nd triple digit loss in 2 days. “Fear Index” VIX has also pushed up higher, suggesting that risk aversion is back in the game. Hence it is not surprising to see safe haven gold being driven up higher. Of cost it is hard to justify the entire 30-40 USD gain per ounce on risk aversion, but if we consider that current market sentiment is bullish, is it not hard to imagine some form of over-zealous reaction to buy gold yesterday.
The issue of this over-zealousness is that price may still suffer some pullback even though they underlying sentiment is no doubt bullish. In this regard, the soft support around 1,360 becomes key. If we manage to hold above 1,360, there will be a higher likelihood that prices may be able to to accelerate quickly to 1,400 next week (if we haven’t reach there already by tonight). In terms of probability, there is a higher chance that 1,360 will be broken with Stochastic readings already signalling a bearish cycle with prices potentially finding higher quality support closer to 1,350. Do note that a pullback now does not necessary mean that current uptrend is invalidated. Prices could still be able to test 1,400 next week even in the event of the pullback, just that the journey higher may be slower, perhaps in the same manner as how price managed to edge up from 1,315 to 1,345 this week.
Fundamentally it is interesting to see the really big names clearing their gold positions when smaller name hedge funds and the rest of the market are lapping them up. The good news is that with Paulson and others already clearing off most if not all of their Gold, these smaller names will be able to drive the market higher for a while more. However, in the same vein as above analysis, the trend is certainly down in the long term, and hence it is hard to view current rally as anything but corrective. Price action tell the same story – we have numerous resistances ahead of us, and price would need to push above 1,530 before talks of a longer bullish recovery can take place.