Bulls in control of gold

Gold has been a key talking point on the trading floors for a week or so now and is seeing a great start to 2015, although not if you price gold in Swiss francs.

Source: Bloomberg

The inverse correlation with the USD has broken down substantially and traders have been buying gold as a hedge against central-bank-induced volatility (predominately against the actions of the Swiss Central Bank), potential European Central Bank QE and other upcoming political risks.

Tomorrow we get the ECB meeting. The central bank has to announce a bond buying program to the tune of €40 billion or more (this will include sovereign bonds) or we should see a strong reversal in a number of markets.

The key behind the announcement from Mario Draghi (who speaks at 00:30 AEDT) is to achieve credibility around his statement that he wants to expand the ECB’s balance sheet to similar levels as seen in early 2012. This means the central bank has to look to buy assets over €600 billion. Anything less than €500 billion, accompanied with a forceful bias that they plan to cement their view of doing whatever it takes, and the market could be disappointed.

Naturally EUR/USD, gold, European bonds and indices like the DAX, CAC and Eurostoxx will be in focus as a result and, as stipulated, any disappointment could be met with a fairly vicious reversal.

Gold, and more so silver, are seeing strong bullish price action of late. Throughout the later stages of 2014 we saw two huge bullish key day reversals (as circled on the chart) which showed gold was basing and the bulls are gaining control. We have also seen a multi-month inverse head-and-shoulders developing and this has now formed nicely with the neckline seen at $1225. The target of this pattern is at $1345, which is in-line with the July highs.

The metal seems a touch overbought at present if we look at the stochastic and RSI oscillators, but this shows that the bulls are in full control and momentum is strong. Pullbacks look like buying opportunities in my opinion and the ideal entry level seems to be around $1256, which is just above the October high and 38.2% retracement of the rally from the 2 January swing low.

If we look at positioning as well, traders are certainly getting more bullish and if you look on Friday at the Commitment of Traders report (which measures the net futures position held by speculators and leveraged funds), it showed the highest level since August 2014. Net longs have been building for a number of weeks it seems.

Click to enlarge

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.