What's next for gold

After hitting yearly lows earlier in the year Gold is now showing signs of a potential medium-term recovery. The yellow metal traded sideways for the most part of the previous 2 months but has now broken outside of its former price range between $1,180 and $1,215 to reach as high as $1,234 last week. Is that a sign of more gains to come?

We believe that the odds for Gold to continue moving higher are mounting and there are a few reasons to support this case, both from a fundamental but also a technical and positioning perspective.

Starting with the fundamental view, our view is that the Dollar is facing a number of catalysts that could push it lower and this would be reflected on Gold's prices by pushing them higher: lower inflation readings, slowing consumer spending and a ballooning twin deficit suggest that the greenback may have peaked for the year or could at least see a medium-term correction lower.

This is also reflected on traders' positioning with institutional money reducing their short bets on the yellow metal. According to a Bloomberg report, net buyers over the recent week added more than 65,000 contracts while they reduced their speculative shorts by around 50%, resulting in 45,000 open long contracts.

Granted, investors are still massively net-short on Gold but if this trend of selling positions unwinding continues then prices will follow the path of least resistance that points higher.

Finally, from a technical standpoint, the medium and long-term charts for Gold indicate a supportive outlook: the higher low posted at $1,182 on September 28th - compared to the $1,160 bottom mid-August - suggests that Gold may have carved a medium-term bottom and prices are now looking to proceed higher.

XAU/USD 6-month chart

Source: Bloomberg

Furthermore, the break above the $1,215 resistance indicates that prices are building momentum to the upside, which combined with the change in traders' positioning suggests that Gold is poised for more gains - especially if the fundamental factors we mention above come into play ie. weaker Dollar as US domestic growth slows down in Q4.

In that case, we present our case of a long opportunity that may mature over the course of the next few weeks: we identify the break above the recent highs of $1,234 as the trigger and we would expect prices to rally as high as the $1,265 area.

The analysis has been prepared by the ADSS Research team.