In trying to find the next direction for gold it is very helpful to be aware that the ETF investors that really helped push gold higher are continuing to reduce their positions.
ETF flows have increased heavily during 2020; flows dropping now?
The holdings in gold-backed ETFs fell more than a million ounces in November. This means that gold-backed ETFs are on course for the first monthly decrease this year. Gold prices have been pressured since November 09 and the good news of Pfizer’s/BioNtech’s vaccine news. The sudden spike higher in US 10-year bond yields sent the precious metal falling and the USD pushing higher. This provides a natural drag on gold prices.
However, since the initial reaction in the US 10-year yields and the USD, we have seen the USD drift lower again which is more supportive for gold. This has meant that gold has mainly stayed within a tight range above $1850. Any continued retreat from ETF investors does continue to make the case for a near-term downside.
However, the area of $1800/$1820 does look like a decent support level for gold. The medium case for gold buyers has certainly not gone as interest rates around the world are still expected to stay low for the medium term. The Federal Reserve is not planning on raising rates until 2023. QE shows no signs of slowing and large demand from China should return in time for the Lunar New Year. See last week’s post here.
One low-risk entry idea
If this bullish outlook for gold proves to be correct then conservative traders could always take a break on the trending higher by using a buy-on-stop order. If the trendline break ultimately fails after a break then pull the longs and come back another day. This is a way of managing risk for investors trying to get into a long, but aiming to minimise their risk. Slowing ETF outflows would also be a great sign for a bullish move higher and could be a great cue for timing a long into early 2021. So, keep an eye out on the latest ETF flow news.