Gold steady ahead of a busy week

Gold is little-changed today, mirroring the price action of nearly all the other financial markets.  Undoubtedly it is the absence of US investors due to the Labor Day holiday which has been the main reason behind the uninspiring trading conditions. On Friday, gold finished the session lower but still managed to end higher on the week. That was the first gain in the last three weeks and the second in the last seven. Clearly, the trend has turned somewhat bearish following the upsurge at the start of the summer. Gold’s inability to push meaningfully higher in the face of continued geopolitical uncertainty throughout the summer months does not bode well for bullish investors. Realising this, some of the potential bullish financial speculators have remained largely on the side-lines. In fact, some have even stepped up their efforts to withdraw from gold recently. Indeed, according to the CFTC, net long positions were reduced by a further 21% to 81,182 contracts in the week to 26 August. Net long positions on gold are now at their lowest level since mid-June. At the same time, ETF investors have also reduced their holdings. In August some 6.8 tons of gold were withdrawn from the SPDR Gold Trust, the world’s largest gold-backed ETF. At 795 tons, total gold holdings in the ETF are at their lowest level since the end of June.

Bullish speculators are being discouraged from investing in gold by the fact the US dollar and stock prices are both rising at the same time. While the equity markets remain resilient, it is difficult for gold investors to justify buying an asset that pays no dividends or interest and costs money to store. And with the VIX trading at these low levels, which suggests that stock market investors are not foreseeing any major shocks, equities could push further higher and demand for safe haven assets like gold and the Japanese yen may continue to fall. In the short-term however, both equities and the dollar may come under some pressure if this week’s US macroeconomic data disappoints expectations. Only in that scenario may we see some solid interest in gold, otherwise more losses could be on the way in the near term.

From a technical point of view, the converging trend lines that are visible on the daily chart below, which have been in place since the start of the year, suggest gold’s volatility is declining and that an eventual breakout may be on the cards. Until that occurs, gold is likely to oscillate tightly around the $1300 mark.  But with this being an NFP week, there is a chance we may see a decisive push in either direction.

Figure 1: