Exactly a month has passed since the publication of my article on the precious metals market, where I considered their prospects and wondered - why is gold lagging behind other commodities? Since then, gold has shown impressive results and found directional movement. In this regard, today we will analyze its dynamics from a fundamental and technical point of view, weigh the pros and cons, outline the horizons and targets.
Speaking about the factors affecting the price of gold, it should be noted that in the short term, the quotes are greatly influenced by the inflows and outflows of gold in exchange-traded funds - ETFs, and the positioning of traders in the futures markets. I want to note right away that in these segments, over the past month, the situation has changed but only slightly better.
According to the latest World Gold Council report, gold ETFs lost 18.3 tons of gold in April, which does not support the positive dynamics of quotes. At the same time, the outflow of investors' money from gold slowed significantly (Fig. 1), and in fact, the decline in reserves occurred only due to the withdrawal of North American holders from gold, while European and Asian investors bought gold. As a result of the withdrawal of investors, gold-bearing funds from the United States lost 28.4 tons of gold worth $1.6 billion. At the same time, European funds increased their reserves by 10.6 tons, which is equivalent to $514 million.
Figure 1: Gold Price and Stock Trends in Gold ETFs
In total, since January 2021, American funds have lost 174 tons, European funds - 39 tons, while Asian funds, on the contrary, have increased their reserves by 17 tons of gold. Given that gold is denominated in dollars, and ETFs from the US are the largest, it is the dynamics of capital outflow from North American funds that have the greatest impact on the price.
Another significant factor influencing the price of gold is located in the futures market. So far, there are also few changes for the better. The Open Interest (OI) level, which is an indicator of supply and demand, has remained at its minimum since February 2021, just over 600,000 contracts. For comparison, in August 2020, the OI was almost twice as high and amounted to about 1,135,000 contracts. At the same time, the aggregate positions of traders also remain at constant values, which indicates a low interest of traders. On the positive side, we can say that the demand for gold has stabilized and has not been decreasing for two months now. In this sense, one can hope that the quotes reached their bottom in March and April of this year.
Fig. 2: Yield on 10-year US Treasury bonds, in percentage points.
The increase in demand for the precious metal is currently observed in Asia, particularly in China and India, which is associated with a recovery in consumer activity, including in the jewelry sector. However, due to the COVID-19 epidemic in India, Asian demand may decrease significantly in the near future. Among the positive aspects affecting the price of Gold, it should be noted the stabilization of the yields on US Treasury bonds (Fig. 2), which stopped growing and went into the range, as well as the weakness of the shares of high-tech companies. This led to a rise in shares, the so-called value companies, and a return of investor interest in traditional assets, including precious metals.
Thus, summing up the fundamental part of the review, it should be noted that the prospects for gold are not very bright yet. However, there are still hopes for improvement, and these hopes are connected with the pace of vaccination in the United States, and the delayed demand of Americans in the consumer market.
Technical picture: Gold gives me more optimism than the current fundamental negative. On the daily time frame, attention is drawn to the "double bottom" reversal pattern, and the price momentum that gold received in early May, breaking the $1,800 mark per troy ounce. On the positive side, it should also be noted that the price is above the moving averages, which suggests its further rise. At the same time, the current growth has not yet transformed into the beginning of a new trend, and so far it assumes a correction to the downward movement formed in January-March 2021.
Figure 3: Gold technical picture, Daily time frame
Figure 4: Gold technical picture, Weekly time frame
The fact that gold has not yet returned to the upward trend is clearly visible in the weekly half. Indeed, the past week ended with a rise in price above the average annual values, which may suggest a return of Gold to the upward trend. Indeed, the readings of the RSI indicator are in a "bullish" configuration, suggesting further growth. However, the MACD indicator readings are still in the negative zone and are only indexing the correction to the August-March decline.
What targets can traders pursue in investing and trading gold at present? In my opinion, on the daily time frame, Gold's prospects are limited to growth to the level of $1,950 per troy ounce, this is where the first recovery target is now located. However, there is a nuance - the closest level, where you can conditionally place a stop order, is just below the $1,750 mark. There is still a level of $1,720 below, but if you enter a trade with such a level of loss fixing, then the target should be selected at a value of $2,050 and above, that is, at the top of historical highs. In general, this is also an acceptable option, but it can take a long time to implement. Therefore, taking into account the fundamental data, traders should limit themselves to lower, and therefore faster achievable targets, or wait for a more acceptable ratio of profit and risk ratios.
Investors working without leverage may not be as scrupulous in choosing an entry point and consider the levels of $2,050 and $2,350 per troy ounce as targets. However, even investors should consider locking in losses when the price of gold drops past the $1,670 level. You can never hope that a deal will go through without problems. Regardless of which category the reader belongs to, we should all remember that obvious scenarios are very rarely realized in the market, and what seems likely today may become completely unclear after a while. Be careful and make sure to follow the rules of money management.