Market Report: Gold Finds A Level

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by Alasdair Macleod, GoldMoney:

Having become very overbought, gold is consolidating. In a choppy market, this week gold had up and down days of $20 moves. By early morning European trade today, gold was up a net $6 on the week at $1407, and silver for a change outperformed gold ending up 14 cents at $15.13 over the same time frame.

watch 1

With final expiry of the Comex August contract at the end of this month, in futures markets gold has a strong headwind to overcome. Last night (Thursday) open interest in the August contract stood at just under 350,000 contracts. The longs are faced with a decision as to whether to roll, sell or stump up mega-cash and stand for delivery. The bullion banks are on the other side of the trade and are like alligators patiently wait for a good feed.

In the alligators’ favour lies the long’s practice of leaving stop-loss limits and their exposure to margin calls. The longs are bound to be nervous when gold appears to lose short-term momentum. The extent of the problem is exposed in our next chart, of the net long positions held by speculators.

Watch 2

We can see that ten days ago that Comex futures were suddenly in overbought territory. We will know last Tuesday’s position later today, but it is unlikely to be much better.

Consequently, we can see that an overbought position and a contract expiry suggest more consolidation is likely. The technical chart sends a similar signal, which is up next.

Watch 3

The little consolidation area between the pecked lines is a flag, which gives a target that mirrors the extent of the preceding move. At $1425 that objective has been satisfied, suggesting a larger consolidation is now in order.

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