Here is an update to the macro situation as I see it in the Gold market.
FED / Fed = Federal Reserve
There was a decent sell off in gold from around February 11 – 20, 2013. Gold fell due to disappointed bulls and hedge fund engaging in profit taking. Higher economic data out of the United States led to expectations that the Fed may vary QE and thus people sold Gold. Also other economic assets like stocks were performing much better and some people wanted to rotate out of gold into stocks and other assets that could perform better in a more risk appetite type of environment.
Market Sensitivity was bearish until macro exhaustion set it around February 21, 2013.
However, the sensitivity has shifted to neutral during the congestion phase, as the market tried to probe downside stops, but was met with short covering from March 1 – 8, 2013.
Previously, good economic data out of the US, led to a decent gold sell off. But between March 1 – 8, 2013, good economic data out of the US only led to around a first minute(FM) sell off in gold, which was then bought up with bargain hunters and short covering. Instead of the ODVE or MDMM sell off, gold ended the days roughly flat or so even when good US data came out.
Now the sensitivity seems to have shifted to the slightly bullish side. On Thursday, March 21, 2013, Gold rallied even though the US unemployment claims came out around expectations. This was a very interesting situation. To me this looks like a bullish market sensitivity shift.
It seems that there are a few potential bullish scenarios that could take hold in the coming weeks:
1. The market may believe the Fed will still engage in max QE ($85 bln per month) for quite a while, even if economic data comes out better than expectations
2. If the US economic data happens to come out slightly worse or neutral, that will cause expectations for the FED QE to continue for longer and if the data happens to come extremely worse than the Fed can even expand QE more (of course lower probability scenario from current market moment).
3. Japan is set to engage in pretty big QE program. The Federal Reserve is the most important central bank with regards to QE affecting the gold market. However the Bank of Japan can have some serious firepower as well. So if Japan is set to begin some sizable QE program in April and continue that every month or so like the FED does with open ended purchases, that can cause Gold to rise.
4. The Bank of England may engage in further QE
5. Weaker economic data out of Europe can potentially tempt the ECB to do some stimulus measures or for the national governments to do more stimulus (lower probability scenario).
The potential bearish scenarios for Gold are:
1. More Hedge funds and participants taking profits in gold and shifting into more risk assets.
2. Good economic data comes out from US, causing FED to issue warning that they may vary QE imminently
However, with the sensitivity shift in the gold market, it seems that the market is “sold out.” Sold out meaning a lot of the aggressive macro sellers have already tried to push the market lower to no avail. So with the market “sold out,” it means that the market positioning is in favor of gold breaking out to the topside. Market positioning, meaning that there is pent up news/sent/fund/macro capital sitting on the sidelines willing to go long gold, and some more short covering that can occur on a technical break higher, or some macro reason to go higher.
I wanted to share my thoughts with you and explain the current very interesting situation that I see forming after completing my daily habits.
From a chart pattern perspective, Gold was “hammering” out a bottom. However, the far, far more interesting analysis is in the form of the market sensitivity and scenarios that I described above. For when you combine the market “acting right” with proper macro catalyst, you have the potential for better and cleaner volatility movements. The charts may look nice, but there is much more interesting and lucrative analysis you can do when you analyze the market in terms of news, expectations, scenarios, macro, sensitivity, etc.
As I finish writing this, Gold is at $1613 / $1614 or so, lets see what happens.