Gold To Rally On Data, Not Hope – David Brady

“a rally to 1360 or higher in Gold within the next three weeks is based not on hope, but data.” Here’s the details…

By David Brady via Sprott Money News

My belief that a rally to 1360 or higher in Gold within the next three weeks is based not on hope, but data. Signs that a significant Gold rally is pending or has already begun…

POSITIONING

At 16.5k contracts, Money Managers’ (or “Funds”) net short position is the lowest since Jan 19, 2016, when Gold began its historic rally from 1045 to 1377, or $232, in the next six months.

Commercials net short position of 116k is the lowest since Feb 9, 2016, excluding 4 weeks in July 2017 when Gold rallied from 1204 to 1362, or $158, in just the next two months.

Commercials gross long position of 203k is the highest since July 2013, when Gold climbed from a low of 1207 to 1434, or $227, in just two months. It is also the fifth highest gross long position ever, i.e. since 1986. That’s the fifth highest in the past ~1500 weeks. It was only higher in two weeks in each of 2013 and 2010.

GOLD open interest has fallen another 5k to 469k as of Tuesday close this week. That’s a massive 44k contracts in just six days. Gold rallies tend to occur from relatively low levels of open interest. Typically this is when open interest is 450k or lower, but this may be sufficient and it can always fall further in the next few days.

SENTIMENT

Sentiment has predicted every peak and trough in Gold since Dec 2015. Gold’s Daily Sentiment Index, or “DSI”—my preferred tool for monitoring sentiment—is back to overbearish lows that have only occurred prior to significant rallies.

Furthermore, the 21-day moving average is back to such overbearish lows also, which suggests that the coming rally will be one of the biggest in the past several years.

TECHNICALS

DAILY

Gold is being held down in the short-term by trendline resistance and its 200-day moving average between 1306 and 1309, but it has significant trendline support at 1275 below. The steepness of the resistance trendline suggests that if and when it breaks, Gold will soar.

Gold is further supported by a rising RSI from oversold levels, a rising MACD that has now crossed zero to the upside, and an MACD Line that is curving upwards from an overextended low.

WEEKLY

Gold has two major support trendlines: the first at ~1280 and the second, and more significant for this bull market, at ~1250. The critical resistance zone remains 1369-1377, dating back to July 2016.

Similar levels can be seen on the monthly chart.

INTER-MARKET ANALYSIS

It looks like the extreme EUR longs have finally been squeezed out with the EUR’s precipitous fall to 1.15. Now that the Eurozone crisis appears to have abated for the time being, it also appears that the DXY has peaked at 95, has since fallen to 94 and will likely go lower in the near-term. The DXY has a significant negative correlation to Gold, which means that when it falls, Gold typically rises—although they can on occasion rise together, particularly in times of crisis such as post Brexit.

Gold also has an inverse relationship with nominal and real bond yields. 10Y yields have fallen from 3.11% on Thursday, May 17 to as low as 2.76% yesterday, and are now around 2.85%. 5Y Real yields have also fallen from 78bp to 60bp yesterday and are now at 64bp. This, too, is typically supportive for Gold prices.

FUNDAMENTALS

As I shared in my previous report, “Gold Awaits its FOMC Fuse”, the Federal Reserve is expected to raise interest rates another 0.25% at its next meeting on June 13. Gold has rallied after five of the last six rate hikes, and given the decline from 1369 to 1281 in recent weeks ahead of the next meeting, plus all the signals pointing north for Gold, this will once again likely be the catalyst for the next rally.

In addition, given the crises in Italy and Spain in the past week and the growing concern regarding possible “contagion”, expectations for a rate hike have diminished somewhat, as can be discerned from the massive drop in the 2-year treasury yield recently. I still expect Gold to rise post the FOMC meeting whether the Fed raises rates again or not, but if they don’t, Gold could truly soar on such news.

In summary, everything still points to a rally to 1360 or higher in Gold either before or immediately after the FOMC meeting on June 13. In fact, based on declining open interest, falling yields, a falling dollar and declining rate hike expectations, the data has only improved for Gold.

The only caveats are a surge to higher highs in the DXY or bond yields, a rate hike coupled with a surprisingly hawkish Fed on June 13, or a deflationary stock market collapse. None of which I expect in the short-term