On Gold 8217 s Speculative Interest

In our Friday note, we spoke about the so-called extremes in EUR/USD shorts vs. the relatively stable pick up in USD Index longs among speculative futures traders in the Chicago Mercantile Exchange. So what speculators’ positioning in gold and oil? As of last week, net longs in gold contracts have stabilized at 115,151 contracts, a slight nudge higher from the prior week’s 114,142 contracts, which was the lowest since January 2009.

In order for gold to reverse the current downtrend and regain the 4-year-trendline support, it would have to close the current month above 1615-20. The probability for gold to close at or above this level by Thursday remains technically feasible. Fundamentally, gold has increasingly fallen during bouts of risk aversion, accompanied with a falling euro and broad gains in USD. Infrequently, but far from never, we saw gold rising during disappointing US figures on the hopes that the Federal Reserve would re-instate a new dosage of asset purchases later this summer.

Considering that net long positioning in the USD index is only at 2-month highs (compared to all-time highs in EUR/USD shorts), we may surmise that the further upside potential in USDX may tip the balance against gold and into the US currency. The factors prompting such sharp moves may be: a mismanaged Greek exit from the eurozone; lack of resolution and deadlock between Athens & Troika without necessarily a Greek exit; unsuccessful interventions from global central banks; the Fed’s reluctance to issue a second round of outright QE. Operation Twist is not deemed a sufficient generation of liquidity and a booster of risk-on trades if on its own.

In the event that gold does close the month above 1615-1620, then the subsequent barrier to take out is the 1663, which the 55-week MA, a technical level, long acting as a previous support during between mid March and early May.