Gold stuck in a rut in the wake of the Brexit-inspired surge
Gold magnetically attracted to its $1,340/oz average price
Fundamental drivers are intact but warning lights starting to flash
Gold Stuck Near $1340 Ahead Of Fed’s Jackson Hole Gold futures were slightly lower Wednesday morning, as markets were in limbo ahead of the upcoming Jackson Hole speech from Fed Chair Janet Yellen.
Yellen is expected to signal at least one interest rate hike is imminent, but stubborn low inflation may compel the Fed to keep rates low through the year. Gold was down 4 dollars at $1341 an ounce, having seen little movement this week. At 10 am ET, the National Association of Realtors is scheduled to release its existing home sales report for July. Economists expect existing home sales to come in at a seasonally adjusted annual rate of 5.520 million units.
Since the post-Brexit surge gold has increasingly found it difficult to make any decisive move in either direction. During this time, the price of gold has been averaging $1,340/oz, a level that has been touched in 12 out of the last 14 trading days.
While the underlying fundamental drivers remain intact this may still turn out to be a sideways correction following the post-Brexit surge. Some warning lights have, however, started to flash which could indicate that gold, just like in May, could be facing another correction.
Total holdings in exchange-traded products backed by gold have seen limited change for the past few weeks while hedge funds have been net-sellers in five out of the past six weeks. Despite this, gold has nevertheless managed to stay range bound with other drivers providing support.
Market risk appetite remains elevated courtesy of the biggest central bank experiment in the history of finance. Liquidity continue to search for a home and with an increased amount of sovereign bonds trading at very low or negative yields these funds have flowed into higher yielding currencies and out of the dollar. The weaker dollar has so far helped offset the adverse impact of a rising stock market and slightly higher US bond real bond yields ahead of the Jackson Hole speech by Fed chair Janet Yellen on Friday.
Source: Bloomberg, Saxo Bank
The options market, seen through the lens of the SPDR Gold Trust (GLD), the world’s largest gold ETF, sways heavily towards the bull camp. During the past week nine out of the ten most traded options strikes on GLD were calls. This could be a reflection of the current stalemate and rising correction risk in the market. Investors are therefore using options to have the exposure should it pop higher while at the same time maintaining the opportunity of picking up the ETF cheaper following a correction.
Gold has been trading sideways for the past two months with the range continuing to decline. Fundamentals support further upside but investment flows could indicate a deeper correction may be needed in the short term.
The band of support between $1300 and $1315 needs to hold in order to avoid an exodus from hedge funds similar to what we saw back in May.