The consolidation in the gold market ended with the New Year holidays as well as rocket salvos in Iraq, where the United States killed the commander of the Kudes Iranian unit, Qassem Soleimani. Thank God, the global war did not happen, but the nerves of the investors completely lost, and they rushed to buy gold in full accordance with the forecast published in early December 2019. However, the time has come to look at the prospects of the precious metal and make adjustments to the assessment of the situation.
As we know, the position of traders in futures contracts traded on the CME exchange has the greatest impact on the price of gold. The latest data from the Traders Obligations Report - Commitments of Traders (COT) Reports, published by the US Commodity Futures Commission - CFTC, indicates an increase in the volume of new money entering the market. In addition, the Open Interest of the gold futures contract grew from 926 thousand to 1197 thousand contracts, or almost one third between November 29 and January 10.
Such an increase in the interest of market participants in gold, which took place against the backdrop of a rise in stock indices, suggests that the departure of the price of gold to the level of $ 1,600 per troy ounce was not an accident caused by the geopolitical situation. The assassination of the general was just an excuse for the precious metal to begin to rise again after a period of consolidation that lasted until the end of the fourth quarter.
Moreover, it is very important that the increase in the price of gold was supported by speculators Managed Money, whose long positions during the period from December to January grew from 225 thousand to 300 thousand contracts. According to the CFTC classification, Managed Money are a priori net buyers. Thus, the demand for gold from buyers was accompanied by the opening of new positions in the futures contract, which suggests fundamental reasons for the continuation of the current trend. Due to this, exchange traders felt the potential and began to increase positions.
If the increase in the price of gold was caused only by the development of events in the Middle East, then, firstly, we would not see a constant influx of new money that occurred in December, and secondly, Managed Money, which are speculators, could simply not react on the events that are happening.
So, for example, what happened in September 2019 and January 2020 in the oil market. The attack on the Saudi oil infrastructure was not supported by the influx of new money into the market, and speculators were in no hurry to open new long positions, which subsequently led to a decrease in oil prices. No demand - no price increase. In December, speculators bought oil, but almost no new positions were opened in the futures, which led to a decrease in oil prices as soon as the situation in the Persian Gulf area stabilized.
However, we have an increase in Open Interest in gold and an increase in purchases by speculators at the same time, which qualitatively distinguishes this situation from the situation in the oil market. On the other hand, the price of gold declined slightly after the crisis between Iran and the United States was resolved, and this is natural, but do not be fooled by the possibility of a potential reversal, since most likely there will not be a deep decline in the gold market.
We will analyze the positioning of traders in option contracts. The most liquid option contract now is the February contract OGG0 with the closure on January 28 (Fig. 1).
Figure 1: Open Interest in an OGGO Option Contract.
First of all, the significant predominance of "call" options over "put" options is noteworthy. The Put / Call Ratio coefficient is 0.71. This means that there are only 71 Put options for every 100 Call options. In the context of the growth of Open Interest, optional barriers may not withstand and miss the price higher. With this ratio, the importance of the Max Pain point located at 1500 also decreases, and returning to this point at the time the option contract expires is becoming less and less likely. This must be taken into account when opening gold sales positions. Option barriers hold the price well, but only when there is no trend on the market.
In this regard, it can be assumed that the levels of optional support are at 1510 and 1500. There are also graphic levels of price support, where gold can return by the end of the month for purely technical reasons. After that, there is a possibility of further price growth over the next three to six months, which implies a rise in gold to the level of $ 1,750 per troy ounce. Thus, sales to the levels of 1,500-1,510 dollars will be inappropriate, but such a price can be an ideal point for buying gold, unless, of course, by that time there will be a change in the mood of buyers in the futures market. Short-term goals for such purchases may be levels 1500, 1575 and 1600, formed by options such as "Call".
Today, the World Gold Council - published its forecast for 2020. The forecast indicates the main factors that, in the opinion of the Council, will affect the price of gold this year. It is assumed that financial uncertainty and low interest rates in most developed economies will support the price of gold, as investors will seek new sectors to protect investments and generate income. As a result, demand from central banks will also remain high. This, combined with investor interest, will allow gold to be added back to its value in all currencies.
According to WGC experts, the price impulse and positioning of traders will also support the price of gold. At the same time, volatility and expectations of weaker economic growth in the short term may lead to softer consumer demand, but structural economic reforms in India and China will support consumer demand in the long term.
Thus, traders trading can earn on price fluctuations by selling and buying precious metals on the best trading conditions, but investors should not forget that gold has provided them with a yield higher than the US dollar over the past twenty years, while performing a protection function risk investment.
By investing in gold and trading it in the short term, an investor can not only profit from fluctuations in price quotes, but also insure himself against unforeseen market risks. Be very careful and follow the rules of money management.
The material has been provided by InstaForex Company - www.instaforex.com