Forecast:

     Very short term (1M):
Flat
Short term (3M): Flat
Medium term (6M): Flat
Long term (12M): Up
Resistance:
R1 1,400 - Key level
R2 1,500 - Key level
Support:
S1 1,300 - 20 DMA
S2 1,116 - DTL from all-time high
Legend:

D/MMA – daily/monthly moving average
U/DTL – up/downtrend line
ADX – average directional index
RSI – relative strength index
COTR -Commitment of Traders report
MTD - Month to date
YTD - Year to date

 

Technical drivers
Very short term:
Gold encountered some resistance at $1,330 per oz earlier this week. It remains above that level, which is positive, but momentum is falling. As long as it does not break firmly below the 20 DMA, we think gold will remain in an uptrend in the very short term. A daily break below the 20 DMA could produce a negative swing in sentiment and darken the very short-term outlook.

Beyond the very short term: Gold is on track to close above its UTL from its 2015 low on a monthly basis. If it succeeds, upward pressure could intensify in the months ahead from the marked improvement in the short-to-long-term technical picture. The major resistance will lie at $1,400 per oz.  

Macro drivers
Gold has come under slight downward pressure since the start of February, falling 1% after a rally of 3% in January. Gold is up 2% in the year to date, making it the second-best performer after palladium, which is up 11%.

We think the renewed downward pressure in gold prices reflects weaker speculative demand due to the sustained rebound in risk. This results in naturally stronger Fed tightening expectations, a firmer dollar and lower US real rates. Because the dollar and US real rates tend move inversely to gold prices, the recent weakness in gold makes sense.

Yesterday, St. Louis Fed president James Bullard maintained his dovish status by indicating that Fed rate policy is a "little bit restrictive here, and we might be putting downward pressure instead of upward pressure on inflation." But the dollar has continued its advance, exerting downward pressure on gold.

The open interest in Comex gold increased from $53 billion in December 2018 to $62.7 billion this month, according to the World Gold Council. This means the rise in gold prices since start of the year is mainly driven by fresh buying rather than short-covering. 

From a seasonal viewpoint, gold tends to perform well in the first two months of the year.

Investor and speculative positioning
Speculative sentiment and investor sentiment have improved recently. The latest CFTC statistics showed that speculators continued to lift their net long exposure to Comex gold into the end of last year. ETF investors added further positions to their holdings in January, marking a second straight month of net inflows.


Fundamentals
According to the World Gold Council, gold demand reached 4,345.1 tonnes in 2018, up 4% from last year. This was largely driven by demand from central banks, which added 651.5 tonnes to their official reserves - the second-largest annual increase on record.

Conclusion
We see further upward pressure for gold in the near term from a friendlier macro backdrop, which reflects a weaker dollar and lower US real rates following the dovish Fed's pivot at its latest FOMC meeting. As the US cycle nears its end, defensive assets such as gold should perform well.

Trading positioning: We have no hypothetical long position in our trading book.


All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations.