- Gold is being weighed down by waning market sentiment
- The outlook for the USD remains crucial for gold looking forward
- Data shows that Gold futures are unwinding a very net-long positioning
- The technicals point to near-term weakness being a chance to buy.
- What are the ways to invest in gold?
A near-term correction is building on gold. Since peaking at $2039 in mid-April, the gold price has been pulled lower. It is currently trading around three-week lows, with cash gold trading decisively back below the psychological $2000 level.
However, this looks to be a near-term move that is likely to be the source of the next opportunity to buy. As ever, timing the move could be crucial to success.
Gold is not trading as a safe haven, for now
I have been looking at the performance of Gold this year. An initial strong run higher in January. A sharp correction in February and then an even stronger run higher in March.
Here is a chart of how gold has performed, measured against US equity futures, the euro and the US dollar.
There are two interesting observations I have seen noticed in how gold is trading. Firstly, the gold performance is similar to that of US equities. Secondly, the outlook for the USD remains key for gold.
Let’s take the first one. The performance of gold seems to be similar to that of US equities. The chart shows that E-Mini S&P 500 futures and gold have been tracking each other pretty closely over the past few months.
If this is the case, then gold is not trading as a safe haven. If gold and US stocks are on a similar path, then gold is more aligned to the outlook of an asset class that is broadly considered to be higher-risk (well, at least compared to classic safe havens such as the Japanese yen). That means, when risk appetite falters, for now, this seems to be weighing on gold.
The USD performance is still hugely important for gold
So, on to our second observation. The US dollar outlook is still key for gold. The USD and Gold remain significantly negatively correlated.
This is a relationship that is widely held, but perhaps now especially so.
Here is the chart showing the performance of gold versus the USD. It would be very rare to see a more closely negatively aligned chart. When the USD is going down, gold is going up.
The 21-day correlation is currently -0.79. This is also a relationship that has legs. The negative correlation is averaging an incredible -0.77 over the past 12 months.
Now, I am looking at this chart and I see the USD Index is still under pressure to the downside. Gold has turned over recently, but unless the USD moves decisively higher, then I would say that a gold correction will likely be just a near-term move.
Gold futures unwinding a very net-long position
Looking at the CFTC Commitment of Traders Net Gold positioning, I am seeing some justification for the near-term unwind of gold.
The futures have built up a very large long gold positioning. This is also starting to be unwound slightly in the past two weeks. The last time that gold futures started to be unwound after a long run higher was in February, with the move lasting about a month.
So this is a chart that I will be keeping an eye on in the coming weeks.
Gold technicals also reflect the near-term unwind
The technical analysis shows that Gold futures have been channelling higher since early Q4 last year. However, momentum (on the Relative Strength Index) has waned recently.
The 21-day moving average is a decent gauge for the near-term outlook. Having broken below the moving average, this plays into a near-term corrective outlook.
I will certainly be keeping an eye on initial support at $1969.80 but also the late March higher low at $1950.00. This support at $1950.00 is very strong and I am looking for this to hold for the opportunity to retest the highs in due course.
However, if this $1950 support is breached then we could be seeing a much deeper correction once more within the uptrend channel, perhaps towards the low $1900s.
How to trade gold?
Before I go, if you are looking to trade commodities such as gold, I am going to look at a few ways you can do it.
Whilst it is possible, retail traders would tend not to want to take physical ownership of gold. It is expensive to keep your gold locked up in a vault in the bank. Subsequently, financial institutions have devised derivatives and funds that allow traders to have exposure to gold without the requirement to take physical delivery.
Here is how traders can be exposed to gold:
- Contracts For Difference – Retail traders are more likely to prefer trading gold CFDs. You can buy and sell gold to take advantage of shorter-term price rises and falls. CFDs are a leveraged product, allowing traders to increase their exposure by trading on margin.
- Gold-backed Exchange Traded Funds – Investing in gold funds allow for a relatively cheap way to invest in the yellow metal.
- Gold mining stocks – Investing in companies that have business in gold mining is another popular way for retail traders to have exposure.
- Gold futures – Sophisticated investors can trade commodity futures.
