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Weekly Commodity Analysis – Gold
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Yesterday, something interesting happened in Gold. ActivTrader saw its largest spike in bullish volume since July 2021 with the bullish close above previously known resistance. Over the past few years, prices have been tested above $1835 per oz, with a spike in mid-November 2021 falling just short of $1880. In contrast to yesterday, there was no significant volume supporting that rally.
Interestingly, another difference between yesterday’s breakout and the bullish breakout in November is that on the Commitment of Traders report yesterday, producers and commercials reduced their short positions, while November’s short positions were increased. As producers hold the physical, they usually hold a net-short futures position to protect themselves from market declines.
This bullish interest in Gold may have something to do with the Chinese New Year celebrations that will start from January 31st, which is Chinese New Year’s Eve. 2022 is the year of the Water-Tiger, which begins on February 1st. In a quick review of what to expect in 2022, I came up with the following: “Water Tiger of 2022 implies growth, development, challenge, creation, and planning.” No mention of lockdowns, supply chain disruptions, or COVID-19, but a generally positive sentiment. It would be nice to be able to plan and grow at least.
As well as the well-documented inflation and supply chain disruptions we have been dealing with for more than a year now, there are some obvious geopolitical risks. A portfolio exposed to Russia, Europe, and the USA would be well served by de-risking it with gold and the yen. A price break below $1815/oz would cause CTA trend followers to liquidate some gold positions. Specifically, this could occur when the Chinese stopped buying their traditional gold gifts for the New Year.
In Chinese history, gold has existed since the Han Dynasty (206 BC-220 AD). However, the demand for gold increased with the arrival of Buddhism during the Six Dynasties (222-589 AD). Offerings of gold were made, and golden pagodas and statues of the Buddha were built by worshippers.
Rising gold prices are another reason why the demand for gold could be reduced. In the past year or so, when prices have gotten above $1800, they haven’t stayed at elevated prices very long. A good mean regression target would be $1810, which lies within the current trading range of $1680 to $1920.
In addition to holiday demand, there are still some concerns about rising inflation in the real economy, and even though gold does not have a yield, it does depreciate as stocks rise above the ground, but not to the extent we are seeing with real rates in say the US dollar. Gold allows you to lose your wealth at a slower pace than in an inflationary environment.
The Shanghai Gold Exchange reported that Chinese gold demand in 2021 was about 45% higher than what it was in 2020. According to the World Gold Council, Indian demand last year surged to over 1,000 tonnes for the first time in over a decade.
For me, the rising price of gold is driven by positive economics. Whenever people have spare cash, they can buy gold as gifts. Gold’s demand increases on an upward trajectory when the economy is on an upward trajectory due to the additional demand in jewellery and industrial usage. This disappears during recessions and periods of stagnation.
Currently, China and India are the two largest global buyers of gold, though they are not the only countries interested in accumulating gold. With more reserves than the next top 3 countries, the USA wins the title of Top Stacker according to figures published in 2021. Russia’s love of gold at the central bank level is a bit harder to decipher. It could be that the bank is preparing for the geo-politics to get worse as they have now suspended all foreign exchange and gold purchases.
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Gold’s price is clearly stair-stepping higher in a bullish fashion on an intraday chart. An old resistance level might prove to be a good support if it is retested. A break above $1850 with a retest of the $1845 area would be the next possible opportunity to watch out for. If however, we were to get a turn in the price action, the previous levels of support would then become resistance, which easily sets us up for a quick pivot to the short side.
