Gold prices climbed sharply higher last Friday following a weaker than expected US Non-Farm Payroll number. March saw a gain of 192K vs 200K expected, while headline unemployment rate remained flat at 6.7% vs a 6.6% forecast. This ignited speculation that the Fed will reduce pace of QE tapers, inflating the prices of Gold. Perhaps more importantly, the employment figure miss sent Stock prices sharply lower – S&P 500 shed 1.25%, Dow Jones Industrial Average by 0.96% and the risk sensitive Nasdaq 100 by a stupendous 2.70%. This surge in risk-off flow pushed safe haven Gold back above 1,300 USD per ounce.
Prices has since pulled back slightly but bulls managed to keep prices above the 1,300 round figure. Furthermore, price appears to be finding support from the rising Channel Top, suggesting that a push towards Friday’s swing high is possible. Friday’s rally also allowed the W/W price to move back in to black, and the immediate S/T downward pressure has been invalidated. As such, even though Stochastic readings are currently Overbought, it is still possible for strong bullish push as bias is for a new emerging bullish trend.
Daily Chart is bullish is as well as Stochastic readings suggest that a new bullish cycle is emerging. However, it is difficult to shake off the “corrective” nature of current rally as long as we are trading below 1,315 resistance. As such, even though bullish bias suggest further upside, it is possible that price may simply reverse at 1,315 and this would act as a confirmation for the decline that started in mid March and a quick reversal towards 1,270 will be opened.
Fundamentals agrees with further downside as well. Certainly US economy is not performing as well as the most optimistic policy maker would have you believe, but we are definitely not getting worse. As such, it is highly unlikely that Fed will alter the pace of QE taper significantly. Certainly it is possible that we could see some slight delay by 1-2 months in consecutive tapers, but long-term wise we are definitely looking at a world without QE eventually. This would mean that prices of Gold is still going to head lower.
That being said, there is a chance that Gold prices may go skyrocket as US stocks (and global equities by extension) are all trading at highly inflated and leveraged levels. Should we experience a huge sell-off in stocks it is possible that Gold prices will receive further boost. The problem is that US stocks remained supported for now, as such there is no telling how long more this bearish trend in Gold will continue. Therefore, conservative traders who are betting for a stock market collapse may wish to wait for actual signs of market despair before longing Gold.
In this regard, it seems that hedge funds and institutional speculators are starting to unwind their long Gold positions according to latest COT report. The exact reasons why they are doing this is unknown, but we can venture a guess and it seems reasonable to believe that these speculators were going long on Gold expecting the sell-off scenario mentioned earlier. Unfortunately for them, it seems that a sell-off in stocks isn’t forthcoming and it is not surprising to see these professional traders cutting their losses early. This is yet another bearish pressure on prices and hence traders who want to go long now will need to seek strong confirmations to prevent getting caught by these strong headwinds.