Revisiting gold and its repetitive pattern

Payton Lee

Singapore Sales Trader

Back In November 2018, I wrote an article titled “Tarnished gold may come to shine” as our view at the time was that gold was bottoming in tandem with Federal Reserve rate hikes. Let’s revisit the precious metal: after its recent rally back to the psychological $1,300/oz level and its peak at 1346.80/oz, gold is once again shying away from the $1,350/oz handle.

Source: Bloomberg

Gold did very well since the dip in November. The market saw a gain of nearly 12% in the rise from the November low of $1,196.34/oz to $1,346.80/oz in February 2019. What fueled the rise? And what are the factors causing the rally to ease off?

Unlike other asset classes, we are now seeing some repetitive patterns in the gold price. If this statement is true, there is a very high chance that gold may continue to fall back to its 1,250/oz handle before another bounce. Gold has a strong inverse correlation with the dollar, which has been backed up by better than expected macro data and this year’s projected rate hike calendar.

After reaching a new high on February 20, gold prices lowered as both price momentum and its technical relative strength moved into overbought territory. Gold is correcting as we head into March with the ongoing US /China trade negotiations among the main drivers. The Fed's recent, tentatively hawkish tone has been positive for gold, but it feels like that is not quite enough.

If the Fed’s overall dovishness persists, it will be good for gold, but there is a catch. If the Fed alters its view, it is likely to cause problems in Asian and/or European market; we could ultimately see the dollar maintaining its strength in a lower-rate environment. Within the context of this analysis, we primarily measure USD strength versus EUR and JPY.

The previous US government shutdown took the weekly Commitments of Traders reports offline, but with Washington open again we now see some COT data showing hedge funds and money managers jumping into gold futures in the February rally, which unfortunately failed in its attempt to take out the $1,350/oz handle – something that can be seen on the charts below.

Source: Bloomberg
Source: Bloomberg

Both charts show that US gold ETFs posted significant outflows, signaling that bottoming sentiment is approaching again. Gold ETF flows have yet to turn positive after a rough few days and we have not seen a gold buying flows starting to accumulate over this period. Typically, gold tends to trend lower between March and May gold, but this does not necessarily lead to a bearish tone. As noted, the support range still stands before this precious metal can revisit its peak again. If the dollar declines based on lower interest rates in response to the recession threat, gold could rally significantly, but any price weakness on gold is certainly worth a second look.

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 is not intended to and does not change or expand on this. 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/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.