Gold prices traded in a narrow range in September. The tug of war went on between the bulls and bears with no winners coming on top.
The interest rate hike by the US Federal Reserve was largely discounted and we saw very limited price movement post FOMC meet. Historically we have seen gold going up after a rate hike, but those were relief rally where in anticipation of rate hike, gold prices were hammered. This time, prices remained rangebound and so the muted price action after the Fed meet is not surprising.
The room for further rate hikes is getting limited because the present level of the Fed funds rate is getting closer to neutral rate, estimated at 3 per cent by the FOMC members. That is why the Fed has removed “accommodative” word this time from the statement. This should drive the dollar lower thereby pushing gold prices higher.
Currently, gold prices are correlated with DXY (Dollar Index) by 85 per cent, so any other fundamental factors were ignored by gold investors. Gold is proxy trade for Dollar. The above chart shows that gold has underperformed by more than 4.88 per cent against the DXY. One of the factors that give gold hope is that prices still are above their year to low $1,160. At present, negative momentum favours shorts, but downside potential looks limited.
The shorts (red line) have seen massive added position as on a year-to-date basis, it is 457 tonnes. That is a lot and since the position is at the extreme end there are chances of these shorts getting covered once gold crosses $1,220 on the COMEX.
We have been suggesting that sell side is getting crowded and gold bulls are also defending levels of $1,170-$1,180, indicating that bounce in gold is round the corner. It needs support from DXY.
It is now or never for gold bulls. High short interest levels indicate gold is vulnerable to bull raid. In spite of DXY strength, gold is trading near $1,200 instead of sub $1,170. Fundamentals remain bearish, but we remain optimistic as despite strong US Dollar, gold has not seen as much correction and with such short position in gold, unwound may happen anytime sooner.
Reference: Economic Times
Thai
Eng