Gold is experiencing what in trader slang is known as a "MELTUP". It continues to work higher but on extremely low volume and without much fanfare - very slow and steady.
As a trader, the way we look at this sort of market and interpret the price action is one in which there appears to currently be a lack of willing sellers. In other words, there is not enough overhead offers to absorb the steady bids coming into the market on the heels of the index fund rebalancing which is occurring to start this new year off.
It looks to me like some would-be shorts are sitting back and observing the price action and waiting to see when the index funds are going to be finishing up before they come back in more aggressively. After all, if a bunch of investment money is going to automatically be flowing into a market, irrespective of the fundamentals, why fight it? Just let them bid it up and then move back in when the buyers have balanced their holdings.
The biggest thing that this current rally has going AGAINST it, is the lack of strong volume. It tells me that no one is in a particular rush to buy the metal other than the index funds. The other thing is that the mining shares are struggling to add to their gains today. Some of them have gone into the red. Thirdly, crude oil and the products are both sharply lower along with the Goldman Sachs Commodity Index. If there are any inflationary pressures at work across the general commodity sector, I sure cannot see it based on what I am seeing in the futures markets.
There does appear to be a bit of safe haven buying that is continuing today. Just like in yesterday's session, when the equities were moving lower, both the US Dollar and the Japanese Yen, safe haven currencies these days, moved higher, so too that is continuing right now as I type these comments.
I do not know exactly how high these index funds are going to take the gold price before their buying needs are finished up but they have managed to draw in some fresh buying from other specs and in the process taken out some overhead resistance levels on the chart. These are more easily seen on the 4 hour chart which I am including below.
Note the declining volume as the market "MELTS UP". The resistance zone near $1220- $1225 has been taken out but the next one up near $1242-$1245 remains untested at this point. I am interested in seeing if there will be enough index fund buying next week to set up a test of this level or if the bulk of their buying will be done by the close of trading today.
I would need to see the metal move and stay above that uppermost resistance zone I have noted on the chart to become bullish
Also interesting to observe will be the reaction out of Asia to this upward price push. Gold has effectively gone up $60 from its recent low near $1180. One wonders if this will stymie some physical buying from that corner of the globe as they wait for a retreat in price or if some buyers who had been holding back waiting for lower prices will throw in the towel and come in and commit some funds to replenish inventories that have been drawn down by the strong demand out of Asia.
There are a couple of things currently working in favor of gold for the time being. The first I noted yesterday which is index fund rebalancing as those fund managers benchmarking against the various commodity indices are forced to increase their holdings of gold contracts to bring their overall portfolios into line with the new index compositions. That is bringing buying into the gold market from a spec standpoint at the Comex.
The other is more important because it is longer-term in nature and that is the continued reports of very strong offtake of the physical metal in Asia. You might recall that back in June of the past year ( 2013), it was this soaring Asian demand that put a floor in the gold price when it had sharply fallen to $1180.
I was curious to see whether or not those same buyers were going to show up if gold revisited this area again. It certainly appears that they have.
Why this is important from a trading perspective is that the buying has come in at almost the exact level to the very dollar, namely $1180. I have written previously that this area on the price chart has as much significance from a purely Technical analysis perspective as did the $1530 level in gold. When the latter was violated, it resulted in a huge shift in sentiment in regards to gold and brought large selling into the market as long liquidation then commenced in size along with fresh shorting. The same thing will happen if $1180 gets violated and the market does not almost immediately reverse those losses and rebounds higher - namely, more long-side liquidation and more fresh short selling that will take the price down to near $1150 for starters and possibly to $1100. Remember, large specs are still net longs at the Comex.
So far $1180 is proving to have held, for now. What this looks like is the setting up of a range trade affair with the market moving back and forth between this floor near $1180 and resistance near $1242- $1245. If gold can crack the overhead ceiling, it stands a shot at making a run towards $1260 - $1265 based on short covering alone.
If the market fails to extend past $1242-$1245 odds will favor it dropping back to retest $1220, then $1210 and finally psychological support at the $1200 level.
I remain skeptical that gold prices are going to rally much higher because I believe it will shut off price sensitive buying out of Asia. Western investment demand for the metal is still not there and this requires Asia to do all the heavy lifting. Remember, Asia can bottom a market but it cannot by itself drive prices sharply higher. That requires WESTERN INVESTMENT demand and I do not yet see any strong signs of that.
Let's watch the price action, especially in the shares and see where we go from now. I am especially interested to see how the metal performs at the Comex when the index fund rebalancing is complete. That should be sometime towards the end of next week although the bulk of it is going on right now and should be wrapping up by early next week.
I am also watching silver to see how it holds because it too is benefitting from this same index fund rebalancing. However, with Chinese manufacturing data coming in weaker, according to the data released overnight, copper is struggling this morning and so is palladium. That is bringing some selling into the silver market. Together, the lackluster performance in the metals is eroding some of the gains in gold, especially in light of the firmer US Dollar.
