Golden days ahead?
There are three reasons for gold to continue higher cited by a Bloomberg piece I read this week. They are:
1. Gold futures market in contango
Contango is when the futures price of a commodity (in this case gold) is higher than the spot price. The contango in the gold market is steep which shows that strong demand is likely to drive prices up higher. Strong demand for gold futures has been significant in rising prices since 2019.
2. Gold futures managed money net positions are dropping
They are the least net long in over a year which reflects a strong bull market. This is positive as when managed money is very long in a bull market or very short in a bear market the positions can be extreme and over extended. CME gold net longs on the chart below are around 22% and well below the 50% peak of August. So, with gold fundamentals still in place for longs there is plenty of space for more interest. Also, on the same chart spot price is near the 20 simple moving average on the weekly timeframe (the strong gold line).
3. Gold technicals poised to break out of narrowing bollinger bands.
With spot prices having approached the narrowest 50-day Bollinger bands the recent consolidation is looking like it is at an end. The technical picture favours a break higher. See chart below:
Like the rationale outlined in the article and it complements the broad low interest rate argument for higher gold prices.
The main risks to this trade are all linked up to the US stimulus package and elections of course. See through that and the way ahead seems a lot clearer.
Risk
The main risk to immediate gold upside is USD strength from a surprise Trump win. Or surprise USD strength from a Biden victory. The current expectations are for USD weakness with Biden on improving reflation conditions for the US and reversal of US protectionist policies.
