Precious metals start the week on the back foot

Precious metals are both weaker this Monday afternoon, with gold down 0.5% and silver 0.7% lower. The metals are again held back by a slightly stronger dollar, which has been in demand after the June employment report was much better than anticipated on Thursday. Prior to that jobs data, everything was looking up for gold with speculators jumping on the bullish bandwagon from all corners. As the CFTC’s positioning data showed on Friday, net longs had increased 26% to 126 thousand contracts in the week to 1st July. That, combined with the increases in the prior weeks, had helped to push net long positions in gold to their highest level since November 2012. However, since the start of the month, the price of gold has fallen somewhat, probably as the longs reduced their positions – especially after that jobs report. But there’s still scope for significant profit-taking and if we see that, prices could fall more sharply. Meanwhile the flow of gold into the SPDR Gold Trust, the world’s largest gold-backed ETF, has likewise been strong in recent weeks. It started slowly around the middle of June before rising somewhat more sharply towards the end of the month and at the start of July. On Thursday, total gold holdings at the trust stood at 796.39 tons, which was the highest level since mid-April. However, they are still very low compared to the recent history and for gold to stage a more sustainable rally we do need to see ETF inflows increase more vigorously.

In the short term, whether we will see some more weakness in gold will partly depend on price action around support at $1310, where the metal bounced back from on Thursday. This $1310 mark ties in with the upper side of a long-term bearish trend line that was broken recently, so it is a key technical level. A break below here potentially exposes the next key support at $1285, for a test. But while the metal holds above the $1310 level on a daily closing basis, the bias will remain bullish. On the upside, gold faces near term resistance around $1320, followed by $1325. Beyond these levels is the 61.8% Fibonacci retracement of the down move from the March peak, at $1334/5.

Silver has only been creeping higher ever since it broke the key resistance level of $20.60. This slowdown in the upward momentum has corresponded with the daily RSI drifting into the overbought territory of 70 and beyond. In the past recent episodes where the RSI had been above 70, it had preceded sell-offs in the underlying price of silver. But will it be different this time around? For a start, the RSI being at these elevated levels merely reflects the fact that the recent trend has been comparatively strong. There’s no reason why silver cannot extend its gains just because the RSI is in the “overbought” territory. What’s more, the price action itself is still looking constructive, with silver holding comfortably above the main moving averages and the broken trend line, too. But what silver, and indeed gold, need now is just a little push to break above the recent range highs. If they were to do that then we could well see some renewed buying interest. Unfortunately the economic calendar is looking very quiet this week, especially today and tomorrow, so it is difficult to see where that stimulus may come from other than from continued short-covering.