Gold’s support at 1270$/oz fundamentally not sustainable

Gold managed to close around 10$/oz higher this week compared with the close on Thursday before the major trading centers closed for the Easter Holiday weekend. Also other precious metals posted gains in the weekly comparison. However, we have some doubts that these gains are sustainable.

On Thursday, gold fell to a low of 1268$/oz shortly after noon GMT. From this level, gold slightly recovered and rocketed to 1291.5$/oz at the London PM fixing. There were no complaints that gold had been manipulated higher from the usual conspiracy theorists this time. Technical analysts argue that gold had found support and this triggered a short-covering rally. In-deed, there are several reaction highs and lows located around the 1270$/oz level. And according to the chart theory, those previous highs or lows often serve as support or resistance and lead to market reversals.

However, we are not convinced that it was a technical reaction, which led to the strong rebound, and that gold has a solid basis at around 1270$/oz. Often, when those support or resistance levels are approached, one sees attempts by professional traders to fish stop orders and causing false break-outs with a strong and rapid countermove. This was not the case in the gold market. After hitting the low, gold remained in a consolidation mode for an hour. The strong rise later seems to have taken the market by surprise.

Furthermore, the US durable goods orders data had just been released and it came in much better than Wall Street economists had predicted. Core durable goods orders in March rose 2.0% on the month, while the consensus predicted an increase of only 0.6%. Stronger US economic data is currently not positive for the gold market. Also the reaction in stock markets was positive, which also argues against a technical driven short-covering rally only because gold hit a support level.

The recovery of gold only gained momentum and the price rocketed after stock markets pared gains and turned negative. The reason for this reversal in equity markets had been the recent developments in the geo-political tensions about the Ukraine. Russia’s defense minister announced that he ordered a military drill of forces near the border to Ukraine. Furthermore, the compromise reached before the Easter Holiday did not lead to the agreed results. Ukraine’s acting interim president ordered again troops to move to the eastern parts of the country and to disarm the separatists as well as to regain control over occupied government buildings.

Thus, it is the currently negative correlation between the price of gold and US or other major stock indices, which helped gold to rebound from a technical support level. Our quantitative model for the S&P 500 index, based on macroeconomic indicators, is still long positioned. Furthermore, the recovery of gold was not accompanied by an inflow of fresh capital to gold ETFs. While the holdings of the biggest ETF, the SPDR Gold Trust remained unchanged at 792.14 tons on Thursday and Friday (after falling by 3 tons at the start of the week), gold holdings of all ETFs declined on Thursday according to data compiled by Thomson Reuters.

Therefore, the fundamental factors still indicate that the risks for gold are biased to the downside. The support at 1270$/oz might not be as strong as expected by some technical analysts. However, in the short-run, the geo-political tensions about the Ukraine could remain a dominating factor.