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.
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.