Market Report: Taking a breather

by Alasdair Macleod, GoldMoney:

In early European trade this morning (Friday) gold was down $2 from last Friday’s close at $1,347. Silver is down 25 cents at $17.18. Comex volumes have declined, and the dollar has stopped falling.

It has mostly been about the dollar, and the next chart shows how relatively pedestrian the rise in the gold price has been in the other major currencies.

Since gold bottomed on 11 December, the sterling price has only risen 1.5%, compared with 8.5% for the dollar. In euros, gold has risen 2.2%, and in yen, 4.2%. As a very crude average, we can say that perhaps 3% of the rise in the dollar price is due to gold itself, and the balance due to dollar weakness.

This is confirmed by the fall in the US dollar index cash future, which since 11 December has fallen by 5.5%, which added to our estimate of the price change from the gold side confirms the rise in the price of 8.5%.

Perhaps we should bear this in mind when trying to assess gold’s downside if the dollar rallies, correcting some of its recent fall. If the dollar recovers to challenge its previous September 2017 low of 91.33, we can say the gold price should, all else being equal, fall to $1325. Given that such a rally is likely to overshoot a little, this confirms the lower bound of our estimated trading range of $1,310 to $1,360 shown by the pecked lines in the next chart.

But given gold’s strong performance, at least measured in dollars, we should also take account of how overbought gold has become, or put another way, we should estimate the element of paper speculation in the gold price. Our next chart shows open interest on Comex, which is a rough guide to the degree of speculative froth.

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