The direction of the commodity market is hard to predict, although expertise can help positioning assets for profits both short and long term. Some analysis sound logical to consider in light of a variety of factors such as the uncertain global economic environment, the US Federal Reserve’s lack of clarity on its timing for ending monetary easing measures, interest rates changing, andcurrency fluctuations among others.
Global Economic Outlook Discouraging
The global economy is in a state of recovery, but the recovery is not speedy, neither it has strong fundamentals, nor it is coordinated between the largest economies. Discouraging news headlines about slowing or revised economic growth appear daily in the international financial media. Either the IMF revised its global economy growth forecast or the monthly economic data in the US and China came weaker than expected. The names of the European countries nowadays appear together with status updates such as “fall into recession” or “bailout” discussions. Negative news usually cause worries amongst people and urge them to watch their spending and savings more carfully. The majority of traders and investors are not different. Driven by discouraging news, they now consider balancing their portfolios and “safe haven” assets are the logical option.
Gold Correction Near The End
Much of gold’s correction have already materialized. Gold has come down over 30% from a peak of around $1,900 an ounce in September 2011. An important fact to consider is that the high commodity prices are already priced into goods and assets and a reverse action is even hard to initiate.
Lower Prices – High Demand
Demand for gold around the world is increasing in response to the current lower prices. Turkey imported 44 metric tons of gold in June, increasing demand in the world’s fourth-largest consumer of the precious metal. In the first five months of this year, China’s gold imports have already doubled last year’s levels. Emerging economies central banks keep buying gold.
The Technical Picture
Taking a look at the past 90 days, gold prices have experienced the 16th worst drop since 1968. It has rebounded each of the subsequent 90-day periods, with an average increase of over 20%.
The Options Market
Trading volume in call options on SPDR Gold TrustETF ( GLD ) have just soared to its highest level in over eight weeks.
Call options are bets that the underlying security or commodity will increase in value. A sharp volume increase in call options can signal that professional traders are expecting additional upside in the commodity. Remember, this is despite the rising short interest in the precious metal.
Short Interest – Long Positions
Whenever short interest reaches an extreme level, it can be a signal that the commodity is oversold and ready for a bounce higher.
Presently, short interest in the SPDR Gold Trust ETF is about two standard deviations higher than average. On the other hand, COMEXnet long positions for large speculators recently plunged to multi-year lows, down 79% from the first of theyear and 90% since the summer of 2011. Such a sharp change in positions can often predict that the opposite move is about to occur. Speculative shorts in the metal have reached such a level that it has become an overly crowded trade.
A short term bounce for gold into the $1,410 range looks very much probable.
