Hedge funds were spotted buying Gold up 2 weeks ago, and the question that were in everybody minds were this: How long will these speculators hold their gold positions for? Would they hold it for long-term gains ala John Paulson, or are they simply trying to fade the bearish sell-off – e.g. playing the temporary pullback and selling Gold once again when resistances are hit.
Looking at the latest Commitment of Trader data, Net Non-Commercial Positions have increased slightly, while Open Interest is now at a 7 weeks high, suggesting that speculators are buying AND more importantly holding their positions, which means that they are believing in a longer-term Gold bullish movement, and not a short-term correction. This would imply that Gold will stand a better chance for a longer bull run, not because Hedge Funds get it correct more often than not, but rather because selling activities from quick profit taking from these Funds will be lower, and hence we stand a better chance of bulls breaking resistances moving forward.
From a technical perspective, price has broken the 1,295 – 1,300 ceiling. The break also represent a breakout of the rising triangle that has been in play since 18th July. However, it should be noted that the rally has been a result of an opening gap this morning, and not bullish momentum push. Furthermore, price basically traded flat following breakout, suggesting that bullish momentum isn’t continuing – something that is echoed by Stochastic readings which suggest that price is already overbought. Nonetheless, Stoch readings are still pointing higher, and with current Price levels much higher than the Stoch peaks found on 17th and 19th July, this divergence impairs current counter-trend cycle signal, and hence should not be used as a strong argument for a price move towards 1,300 once more.
Long-term charts is bullish towards 1,330 – 1,340 resistance. Last week’s bullish hammer candlestick acts as a confirmation for the Morning Star bullish reversal candlestick pattern. Today’s gap open is a good sign that traders are looking at the confirmation, which bodes well for a longer correction towards Channel Bottom if 1,330-1,340 is breached. Stochastic readings also favor a longer term correction with a Bullish Cycle signal formed.
Fundamentally, it is important to note that the COT data is lagging, and hence if prices maintain above 1,300 with Net Spec Long positions continuing to increase this week, we will have a better proof that Funds are holding onto their positions instead of closing them at current levels. Also, we should note that part of the reasons why price managed to gap more than 10 USD an ounce this morning is partly a result of high levels of stop losses being triggered, which translate to a one time bullish pressure. The actual number of long speculators may hence be overestimated, and hence it will be important to see price pushing higher from here, preferably entering the 1,330 resistance level and breaking it in order to validate all the assertions made above.
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