Gold prices: Gold breaks out of a narrow range, multiple indicators signal rally ahead

By Aasif Hirani


Gold has finally broken out of its narrow trading range, in which it had been oscillating for the past one and a half month, thanks to a selloff witnessed in equities. Gold is finally getting the benefits of safe haven investments, as the global equity market continues to plunge.

Previously, we did indicate that record short positions are written in COMEX in the $1,218-$1,220 range so any price movement above that zone will trigger short covering. We already witnessed short covering when gold jumped till $1,232 before retracing back to $1,220.

Last Thursday, we saw gold climb 2.5 per cent in intraday trade, logging the highest intraday gain in 2018. This was on account of short interest buildup, which had been quite extreme in recent weeks, and short covering triggered the long-awaited breakout. We believe gold’s safe haven boost was not coming because of rising US yields and general strength in US dollar and a sense that investors are starting to see fairly good value at current levels on the back macro worries.

Gold snip 2

The chart here shows gold-dollar ratio, which again is giving positive signal for the yellow metal. The ratio has closed above the 50-day moving average and is above the down trendline. It is also trading above its previous swing high of 12.75 and needs to trade above 13 to rally further.

Another indicator of safe haven buying returning to gold is the reversal in sentiment towards gold, which shows holding in SPDR Gold Trust, largest gold backed ETF rose 1.3 per cent to 73 tonnes last week. It was the first time since the ETF witnessed inflows since July. It is also the largest inflow since March 2018. As long as gold was trading in a range, we were witnessing huge outflows, as investors were showing a preference for equity and were focusing on safe haven currencies like dollar and yen during economic turmoil.

One of the early indicators for the rally in gold was a one-month bottoming pattern in gold where in spite of a strong dollar, the yellow metal was not correcting as much as it should have. Also, serving a heads up to the gold rally was a rally in copper prices from their September lows. Strength in copper as well as a rally in silver were the harbinger of a rally in gold.

Gold snip 3

Here is a chart that shows how a 2-day fall in dollar index led to huge rally in gold prices.

Gold snip 4

On the ETF front, SPDR gold trust has finally confirmed immediate term breakout as it has closed above 20-day moving average and closed above the down trendline. The bottom at 111 was not re-tested and now it has broken the 111.50-114.50 range. Now the bulls have slowly started taking control and an additional short-covering rally may come if gold again breaks above $1,225. Liquidation in equity market has started the gold rally and now safety-related buying will take this rally further.

(Aasif Hirani is Director at Tradebulls Securities. Views are his own. Please consult your financial planners before taking any investment decision based on the observations made in this article.)


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