Is the correction in the gold market already over?

Within one month, spot gold has lost around 100$ and reached the 1,160$/oz mark. Last Friday, the price of spot gold rebounded and closed at 1,181.50$/oz, a gain of 13.45$/oz on the day. Thus, the question arises, whether the correction of gold is already over. All in all, we still don’t see all signals flashing buy signs. Thus, the increase of last Friday might just be a bull trap.

The technical situation of spot gold is ambiguous. On the positive side is that gold found support at 1,160$/oz. At this level, gold found resistance before on its way up and it already served as a support at the beginning of May. However, those levels of support are seldom taken out at the first attempt. Thus, the rebound might just signal that the bears take a breather before making the next attempt to surpass this support level.

During the recent downward move, gold has fallen below the major pivot low, which marked the start to the ascent of gold to the all-time high at 1,264$/oz. Also on the way down, gold made some smaller corrective moves to the upside, but all these moves did not reach the preceding correction high. Therefore, in terms of the Dow Theory, gold is still in a downward trend as long as it has not made a new series of higher highs and higher lows.

Furthermore, the technical indicators don’t argue for buying gold currently. Spot gold is still trading below the moving average of the Bollinger band and this average often acts as a resistance. The MACD line is below its signal line and thus, has not triggered a buy signal. The stochastics is also in the oversold zone and only a return into the neutral range would be a buy signal. But even in the case that either the stochastics or the MACD trigger a buy signal, we would like to see at least a close of gold above the moving average line of the Bollinger band to go long from a technical perspective.

 Also an analysis of money flows does not provide a clear buy signal for gold. According to the latest CFTC report on the “Commitment of Traders”, the non-commercials have increased their long positions in Comex gold futures by 288 to 228,251 contracts but reduced the short positions by 10,306 to 39,350 contracts. Thus, the net long position of large speculators soared by 10,594 to 188,901 contracts. However, this is still far below the recent peak of 244,725 contracts at the end of June. Small speculators also increased their net long position by 1,297 to 38,654 contracts. As the small speculators have the reputation to get it wrong, this increase of the net long positions is not a strong argument for buying gold. The commercial hedgers appear to expect further losses of gold and thus have increased their net short positions. Furthermore, gold holdings of the biggest gold ETF, the SPDR Gold Trust, have declined further to 1,282.3 tones.

Looking at the intra-day chart of gold, it is striking that gold made the major part of the daily gain after the release of US GDP figures. However, the US GDP growth in Q2 was the least convincing figure for buying gold. The US economy expanded at an annualized rate of 2.4% while the consensus of Wall Street economists was looking for a growth rate of 2.5%. However, a difference as small as 0.002 percentage points in the quarter on quarter GDP growth rates could lead to the difference between the actual and the expected annualized growth rate. Nevertheless, as the markets in the US are already nervous and fear a double dip recession, the lower than expected growth rate triggered a flight into US Treasury paper. But it is not rational to buy gold on economic weakness. In the case that the bond vigilantes were right, then the risk for the US economy would be deflation and not inflation. But real assets like gold are not among the winners during periods of deflation. And those who buy gold because they expect the Fed to return to another round of quantitative easing in order to prevent deflation should have a look at Japan, which still struggles with deflation despite all the quantitative easing by the BoJ.

We do not expect a double-dip recession of the US economy. And our most likely scenario for the Fed policy is a continuation of the current policy. However, also a strong expansion above trend growth is less likely for the US economy. Thus, from our point of view, the Fed policy provides no smart reason for being long in gold.