Gold Returns to Critical lows below 1100

Gold Returns to Critical lows below 1100

By Ben Ryan

Gold managed to get a lot of people excited over the course of the last few months. Following the late July dip to 1080, it was unable to make any further progress to the downside. 1080 became major support, and the metal managed to rally over 100 dollars off of the lows to 1191. Then, in the course of about a week, all that hard work was undone, and gold is back near the lows of 1080, and mere ticks off of making a multi year low at 1073.

There are a few interesting things to note about what has gone on for gold, and how investors are approaching it. Interest rates, or more specifically, the expectation of a rise in interest rates has been the main driver of price. If you take a look back at gold’s price action in the last two months you will find that one basic rule holds: Expectations of a rate rise leads to gold selling, when the expectation is that a rate raise will be pushed further into the future, it gets bought.

The NFP on Nov 6, which came in better than expected, provided the impetus for sellers to knock the metal below 1100. The idea is, better jobs report means the economy is better, and therefore interest rates are more likely to go higher. The logic is not really logic at all. Sustainable jobs are not created from twenty five point raises or decreases in interest rates…. but the soundness of the logic behind interest rate moves, and gold’s reaction to them, is not our concern. We just need to know how gold is perceived at a given time, and what drives investor sentiment towards it. Lately, it has been all about interest rate expectations.

I found it very interesting to learn that the managed money crowd has been behind a lot of the selling. Take a look at the Nov 3 Commitment of Traders.

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Notice The -30,958. That would indicate the amount of futures that the longs in the managed money category got out of during the week. I read this as showing that managed money longs bailing marked gold’s last gasps in the 1180-1190 area. Had gold been able to recapture the 1180 area and consolidate the chart would look far different than it does right now. My view is that “managed money” is using gold as a proxy for Fed hike expectations, and the market is moving largely off of that view.

Wednesday, November 4th the Fed released their minutes from the previous meeting, and the general consensus was that the tone in the meeting was hawkish (expressing a greater likelihood that a rise in rates was imminent). The Friday jobs number helped to support that hawkish outlook…. Good jobs, less reason for the Fed to change their hawkish tone.

Where from here? Gold made a very interesting efforts at the lows at 1073. Unable to even make an effort above 1090, gold found itself retesting multi year lows.

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Note: Gold made highs near 1191 in the week previous to this chart, and likely marked the levels where managed money started selling. The selling was reinforced with the first big red candle you see at the top of this chart.You will notice that selling came in after 2pm on Wednesdayafternoon, just after the Fed had released their minutes.

Look at the volume on the bottom of the chart. You will notice that the the big down candles tend to correspond to high volume the whole way down, showing real selling. On Thursday however, there is major volume on a green candle at the low of 1073. Consider the longer term chart to see why this level is so significant.

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Look at gold from 2007 to now above. As I read it, someone looking to get short futures on these lows would likely be targeting ~1000 dollar gold, near where the old tops from 2007 should serve as support. But those shorts did not get their way on their first try last Thursday. As mentioned in the short term chart above, real volume came into buy at 1073, and defended the previous low. The shorts cleared out quickly as gold managed to rally back nearly 15 dollars, likely representing shorts giving up on their immediate plans to capture such a drop.

So now, gold has found some buying around 1073, but has shown a lot of difficulty picking up any steam to push it towards 1100. This is an incredibly significant battle that the longs and shorts will fight out in this range. 40 dollars higher gold looks like a commodity that is finding real support and an ability to hold up dramatically well amidst all of the worlds commodity selling. 25 lower makes gold look very unattractive.

Short term directional trades don’t make sense in this kind of range. If you want to play long or short, I think you need to be working with 25 dollar wide stops and looking for a big move in either direction. If the long/short battle in this range appears to be clearly going to one side, it may be worth it. For now, we will wait to see what this Wednesday’s Fed minutes reveal. We should be looking for any big volume that might come in and use it as important information in getting a sense for the bigger picture in the gold market.

In looking back at what I wrote I had to adjust the 100 handle on a lot of what I wrote. It is so easy to get confused as so many of the numbers 100 higher have such similar to the significance 100 lower (1180/1080 especially). Good luck trading and as always, please feel free to share any questions, comments or critiques.

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