This article highlights three reasons for gold to continue higher as cited by a Bloomberg report on the gold market. They are as follows:
#1 Gold futures in contango
Contango is when the futures price of a commodity is higher than its spot price. The contango in the gold market is very steep at the moment which shows that heavy demand is likely to drive spot prices up higher. Strong demand for gold futures has been significant in driving prices higher since 2019.
#2 Gold futures managed money net positions are at a healthy level
Managed futures positions are at their least net long in over a year which is indicative of a healthy, strong bull market. This is positive as positions that are very long in a bull market or very short in a bear market can indicate extreme and overextended positions. However, CME gold net longs on the chart below are around 22% and well below the 50% high point from August. So, with gold fundamentals still firmly in place for gold bugs, there is still plenty of space for more buyers to step in without any sign of an overstretched market. Furthermore, the spot price is near the 20 simple moving average on the weekly timeframe (the strong gold line) which is near term technical support.
#3 Gold technicals look strong on narrowing Bollinger Bands
On top of price moving towards the 20 SMA spot prices have also approached the narrowest 50-day Bollinger bands. The technical picture favours a break higher as the price is at the bottom end of the band. See the chart below:
The main risks to this trade are all linked up to the US stimulus package and the upcoming US elections. The core risk is USD strength from a surprise Trump win. Although unlikely at this stage watch our for narrowing polls. Another outlier risk is surprise USD strength from a Biden victory. Expectations are currently for USD weakness with Biden on improving reflation conditions for the US and reversal of US protectionist policies. However, in 2016 the US election results were expecting heavy selling in equities and we saw the exact opposite.