The bears are trying their hardest not to allow gold to surpass the $1600 mark as the last four attempts were foiled in their tracks. This type of relentless selling at that specific mark could not be done by the small speculator alone, my suspicion is that a larger financial institution or swap dealer is to blame. What they are realizing now as opposed to the last successful attempt is that the number of headwinds is just too great to keep a lid on prices.
If you look back on September 3rd, 2019, the commercials held a record net short at 401,612 contracts (futures and options) and drove the prices down from $1576 to $1465 three months later. At that point they felt that they were on easy streak with US equities mounting a powerful return to all-time highs, interest rates at historical lows, the economy booming and the yield curve reverting to normal. What we are starting to see now is that commercials are quietly and systematically covering their short positions. Over the past week they had unwound 41,310 shorts leaving them with current net short of 344,788 contracts.
Commercials now realize that Central Banks globally are going to have to react to the economic slowdown as a result of the Coronavirus and create more liquidity in the system. Update: China’s central bank has pumped $243 billion into financial markets over a rolling 4-week period. The Federal Reserve has already begun to pump liquidity into the markets and with interest rates at the lows, they are going to have to get creative. The US has already offered China $100 million in aid to fight the virus and what people must realize is that China is going to be unable to live up to its end of the bargain with the trade agreement. All major industries in China are starting to slip away as a result of demand destruction and optimism over the Phase 1 deal will fade away and Phase 2 is going to get swept under the rug. Investors are going to quickly realize this and exit the equity markets and pile into the precious metals complex.
While analyzing the current technical setup in gold on a daily chart, I believe a new floor is being set at $1550 an ounce with critical support at $1542.8. Once gold pushes back over $1591 we could see another round of short covering by the commercials leaving a charge back to $1600 and the recent highs challenged at $1619.6. This should open a new wave of buying with an upside target of $1650. Use a 2-day close below $1542.8 as a risk management strategy and keep an eye on deteriorating economic data over the next quarter.
Chief Market Strategist
Blue Line Futures LLC
141 W. Jackson #2845
Chicago IL 60604
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