Will the FED provide the catalyst for gold?

gold daily chartAs summer transitions into Autumn, there seems to be little change in the sentiment for gold, which continues to remain rangebound on the daily chart, still transfixed within the Brexit candle of late June. Indeed the price action since then has been mesmeric and symmetrical, with each attempt to rally, duly failing and sliding lower. And setting aside the issue of the FED for a moment, what can we conclude from the technical and fundamental picture for the precious metal?

If perhaps we begin with the fundamental picture, global economies continue to struggle as the currency wars show little sign of abating, with key players now all eyeing negative interest rates (NIRP) with increasing regularity. Last week it was the BOE and the ECB, this week it is the BOJ, with only the Aussie and the Kiwi economies having any wiggle room remaining. With inflation now a dim and distant memory, and with deflation the defacto standard, the prospects for gold remain dim with any inflationary price driver unlikely to materialize for some considerable time. Last week’s CFTC data saw managed net longs reduce their positions from 278,994 to 248,858 with an increase in open interest of 31% and reflecting the increasingly bearish sentiment now prevailing.

From a technical perspective we now have several key levels likely to come into play over the next few days. To the upside, the most well developed of these is at the $1360 per ounce area which has been tested on many occasions, and indeed most recently two weeks ago. This is defined with the red dashed line of the accumulation and distribution indicator, and confirms an area of strong distribution. Immediately below, we have the volume point of control itself which sits in the $1345 per ounce area, and around which the current longer term congestion is now focused. Volumes here are building ever more strongly, thereby confirming the significance of this region, with corresponding low volume nodes both above and below. To the downside, the key level is now firmly in place at the $1304 per ounce region and developing a strong platform of potential support. This area was duly tested in late August but held firm, and, is now the one to watch. However, if this is breached, there is little in the way of strong support offered below, with the potential pause point at the low of the Brexit candle in the $1260 per ounce area.

Indicative of the general malaise for gold are the associated trading volumes, and even the last two weeks of downwards price action has failed to materialize into any substantial selling or participation, with only a drift lower on average to low volume. Wednesday should inject some much needed momentum, and may provide the catalyst for a breakout from the longer term congestion and corridor of price action now defined. Volume as always will be key, and if the big operators do move in mid week, this may then set the trend for gold prices longer term. For investors and longer term traders, patience is the key here, with any breakout from the $1300 to $1380 per ounce area potentially seeing the start of a trend develop. As always it is a question of time – the longer the market remains range bound, the stronger the trend once it begins, as all eyes now focus on the FED and the US dollar.

By Anna Coulling

Charts from NinjaTrader and indicators from Quantum Trading

About Anna 1054 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

5 Comments on Will the FED provide the catalyst for gold?

  1. Anna you mention last week’s CFTC data saw an increase in open interest of 31%. Can you explain what this means in layperson’s terms please ? Thanks Chris

    • Hi Chris – many thanks and I will try to explain. Open interest is the changes in the number of futures contracts which remain open in the market. The futures exchanges work on the principle of matching sellers and buyers, so for every futures contract there is a buyer and a seller, a perfect match. Open interest represents the total number of contracts which are open (not closed) and as such provides a view of flow of new interest. The open interest changes when a new buyer and seller are matched, not when exisiting contracts are bought or sold by exisiting participants, so it is a measure of sentiment and flow which is why rising or falling open interest is so important particularly when viewed against the associated trading volumes in the market. Hope this helps and thanks once again – Anna

      • Thanks Anna for explaining that I think I understand it ?

        But you said – Last week’s CFTC data saw managed net longs reduce their positions from 278,994 to 248,858 with an increase in open interest of 31% and reflecting the increasingly bearish sentiment now prevailing- this confused me?

        Are you saying there was a reduction in long positions by around 30,000 contracts being sold but at same time increase in open positions of 31% of sellers matching buyers in new short positions reflecting increasing bears taking up new short positions ?

        Sorry but I can see how a fall in net longs is bearish but am a bit confused why increase of open interest is bearish unless it’s an increase in new short positions of between buyers and sellers ?

        Thanks again for your help Chris

        • Hi Chris – many thanks and just to clarify – open interest and the changes in net positions are very different. Open interest reports the flow and interest of new parties, but does not reflect whether they are long or short, just rising or falling numbers of new traders. The net change reflects the changes in sentiment from net longs/shorts etc – hope this explains – Anna

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