Access both platforms from your single Saxo account.
Gold challenging resistance as equities drop
Ole Hansen
Head of Commodity Strategy
Summary: Gold is once again challenging resistance as equities wilt amidst a breakdown of China-US trade talks.
Gold is once again challenging resistance between $1,289 and $1,292/oz, as highlighted on the chart below. The combination of weaker stocks, rising volatility and a softer dollar – especially against the Japanese yen – have triggered renewed demand. This comes as uncertainty about what happens next in the trade talks between China and the US rumbles on.
A break above the aforementioned area of resistance could see gold challenge Fibonacci resistance at $1297 followed by $1,306/oz. Only a break above $1,316/oz would signal a renewed challenge of the February peak.
A break above the aforementioned area of resistance could see gold challenge Fibonacci resistance at $1297 followed by $1,306/oz. Only a break above $1,316/oz would signal a renewed challenge of the February peak.
Central bank buying continues
China bought gold for a fifth consecutive month in April. The 14.9-ton increase was the largest since 2016 and it took the year-to-April total to 57.9 tons. As I said in an interview with Bloomberg yesterday: “banks' buying is the underlying demand story which continues to develop from central banks seeking to de-dollarise their reserves [...] what is missing for gold to move higher is a pickup in paper demand through futures and ETFs. Something that will happen if stocks run into a prolonged period of profit-taking and/or the dollar stabilises”.
Paper demand the missing link
Until now, paper demand has been mostly negative with total holdings in bullion-backed ETFs having seen continued reductions this year. This is in line with the continued rise in stocks, which reduced the need for safe-haven buying and diversification. Hedge funds, who are much more price-sensitive, chased the market during this period; in the week to April 30. gold was bought to the tune of 33k lots, making it the second-biggest week of buying this year.
The move returned the position to a net-long and highlighted the continued struggle for direction. However, a break to the upside would force another round of buying from momentum and technical trading funds as they are forced to rebuild a bullish exposure to the market.
China bought gold for a fifth consecutive month in April. The 14.9-ton increase was the largest since 2016 and it took the year-to-April total to 57.9 tons. As I said in an interview with Bloomberg yesterday: “banks' buying is the underlying demand story which continues to develop from central banks seeking to de-dollarise their reserves [...] what is missing for gold to move higher is a pickup in paper demand through futures and ETFs. Something that will happen if stocks run into a prolonged period of profit-taking and/or the dollar stabilises”.
Paper demand the missing link
Until now, paper demand has been mostly negative with total holdings in bullion-backed ETFs having seen continued reductions this year. This is in line with the continued rise in stocks, which reduced the need for safe-haven buying and diversification. Hedge funds, who are much more price-sensitive, chased the market during this period; in the week to April 30. gold was bought to the tune of 33k lots, making it the second-biggest week of buying this year.
The move returned the position to a net-long and highlighted the continued struggle for direction. However, a break to the upside would force another round of buying from momentum and technical trading funds as they are forced to rebuild a bullish exposure to the market.
Keep an eye on volatility
As I highlighted in a tweet yesterday, it is important to keep an eye on the VIX index. The May future jumped above 17% yesterday and that resulted in more than half of the record short position (180k lots on April 30) moving into loss-making territory. With the net-short representing 40% of the total open interest of the futures contract versus 26% during the last peak, the market has been left exposed to additional short-covering if the uncertainty rises further.
As I highlighted in a tweet yesterday, it is important to keep an eye on the VIX index. The May future jumped above 17% yesterday and that resulted in more than half of the record short position (180k lots on April 30) moving into loss-making territory. With the net-short representing 40% of the total open interest of the futures contract versus 26% during the last peak, the market has been left exposed to additional short-covering if the uncertainty rises further.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)