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Gold Analysis (May 7, 2017)

| Swing Alpha on 7 Mar 2017 12:00 AM
Gold Analysis

Gold Is In A Downward Spiral. Here's Why.

This past week, gold went into a tremendous downward plunge.

Just three weeks before, it had busted through the 50-week SMA and gone much higher. Then it mean-reverted back to the 50-week SMA over the next two weeks.

But what began as a normal, everyday pull-back quickly turned into a selloff. On Wednesday, as the FOMC concluded its meeting and announced it wasn't going to raise rates, gold fell through the 50-week SMA and kept falling until it hit the bottom of its upward-sloping channel.

It looked like maybe the channel was going to hold. But on Thursday, the price crashed through the bottom of the channel as quickly as it had the previous support.

Then on Friday, NFP came out and beat expectations. The U.S. economy created 211,000 jobs, more than the 190,000 estimated.

Gold had risen by about $5/oz. in the hours before NFP was released. But when the news came out, it gave up all of its gains and lost more.

Looking back at the past three weeks, it now appears that gold has been in a downtrend for the past three weeks.

So what caused the sudden reversal on April 17 that continues to this day?


Gold Demand Trends Report 2017

Luckily, the latest Demand Trends Report from the World Gold Council was released on Thursday. And it sheds some light on what might have happened.

The report states that gold mining output fell by 36.9 tonnes in Q1 of this year when compared to the fourth quarter of last year. This should be bullish for gold.

But at the same time, gold retail bar & coin and central bank demand fell by a total of 115.3 tonnes. In addition, inventory build among bullion banks and exchanges went negative by 2.6 tonnes as compared to a positive 44 tonnes in Q4 2016.

After subtracting the lower mining output, this means that there was still an extra 122.4 tonnes of gold dumped on the market by gold miners this quarter that was not bought by central banks, retail coin and bar buyers, or bullion banks and exchanges.

That leaves just exchange-traded funds left over to absorb all of that extra gold.

Luckily for position-traders that were long gold in January, exchange traded funds bought 109.9 tonnes of gold in the first quarter instead of selling 193.1 tonnes like they did in Q4. This was a total swing of 303 tonnes, enough to absorb all of that extra gold plus 180.6 tonnes more.

This implies that the reason gold rose in January-March is because of investors buying shares of ETFs.

So who is doing all of this buying?

U.S. Vs. European Gold Demand

Here is where it gets interesting:

Of the 109.9 tonnes of gold bought by ETFs in Q1, only 14.1 came from U.S.-based funds. The vast majority of the rest, a whole 92.1 tonnes, came from Europe.

What this implies is that perhaps European investors have been hedging against a possible Melenchon or Le Penn win. And this has been driving the price of gold higher.

But as the election got closer and fears of a win by these candidates subsided, investors quit hedging and demand for gold dried up.

This may be the primary reason why gold is now falling.

How to Trade Gold This Coming Week.

Gold is now locked in a downtrend with the 10-day EMA and 200-day SMA acting as resistance. A move up to either of these lines is an opportunity to go short.


Right now, the 10 EMA is at $1250.58 and the 200-day SMA is at $1251.97. If these lines are used as entries, a stop can be placed at around $1256.98 and a TP at $1238.15 for a 2:1 reward/risk.

However, the 10 EMA may be in a different place by the time the price hits it. So these targets will have be moved if that happens.

3 Mar 2017 4:38 PM | Anonymous

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