Gold price fluctuates in September quarter on US dollar, North Korea concerns

ABC Bullion’s Nicholas Frappell reviews the performance of the gold market in the September quarter in the company’s precious metals review for the three months.

Gold in the third quarter of the year was initially repelled by the key resistance line that flows down from the September 2011 highs, with the spot price dropping to $US1204-$US1205 before staging a strong rally to close to the highs for another challenge to key resistance.

Although the price didn’t manage to break above the June level or the trend line, it sent a clear message that gold was in dip-buying mode, and the scene was set for another significant rally.

August saw gold ascend to close to the monthly high of $US1300.92, the highest price since November 2016, before continuing to make the high of $US1357.60 on September 8, with some perhaps over-exuberant increases in investor length in the final leg up that left bulls exposed to negative news.

The rest of September was a story of weakening prices until all of September’s US dollar-denominated gains were given and gold found support at $US1288-$US1289, before another rally in the final week of the month.

The background to gold’s rally – and subsequent weakness after the September 8 high – was the performance of the US dollar (USD). Seen via the Dollar Index, or DXY, the USD continued a weakening path before recovering from the low of September 8 at 91.01, showing signs that the slide in the US currency might be basing out.

The fall in the DXY retraced half of the enormous rally from the lows of mid-May 2014 to the 103.82 high in January this year, and this retracement level would be a strong psychological level at which to take stock of the USD’s situation. It appears as if the DXY follows a 38-month cycle from major low to major low, and if so, this current level could mark a turning point?

Additionally, the recent weakness of the Yen versus the USD has mirrored gold’s as a signal of largely ‘risk-on’ behaviour returning towards the end of the quarter, notwithstanding the comments below, and this remains one of the most highly correlated relationships with the gold price, at -0.55 for the quarterly correlation.

The other profound concern for markets in the latter part of the quarter was the behaviour of North Korea and the increasingly fractious dialogue between North Korea and the United States.

It’s worth re-iterating that North Korea is reported to have detonated a thermonuclear weapon on September 3, launched another Hwasong-12 missile over Hokkaido that made it roughly half-way to Hawaii, and then 20 days later, gold was trading almost $US50 lower.

Now, the key thing about thermonuclear weapons, as anyone with a passing interest knows, is their ‘scalability’: once you’ve sourced enough of the right isotopes of hydrogen and figured out how best to ignite the secondary stage of the bomb, you can start to make them as large as the delivery system allows.

Therefore, the ability in recent missile tests to go from a 1000km range to 3700km in the space of May to September is certainly alarming, and suggests that any anti-North Korea coalition has only a limited window to act within, if indeed action is to be taken at all.

The North Korea effect has added uncertainty into the mix, but the macro drivers remain currency moves and shifting expectations around Central bank policy decisions.

CME positioning changes

Taking the July 4 reporting point as a start, gross managed money length climbed from 12.98 million fine troy ounces (Ftozs) to a recent peak of 27.04 million Ftozs on September 12, before dropping to 21.913 million Ftozs by September 26.

Gross Managed money shorts decreased from 9.609 million Ftozs to 2.316 million Ftozs over the same period, reaching a minimum value on August 29, the smallest short position held by Managed money sector since November 2012, almost half a decade previously.

The effect on net positioning was to take it to about 93 per cent of the maximum recorded value of 27.31 million – a powerful signal of investor commitment to gold.

Targets

The downside targets dominate in the short term and this suggests that a test of the Weekly Ichimoku cloud top is likely, where decent support should be found around $US1250, with initial support at US$1264.

Powerful support should be seen at $US1211-$US1224. Upside targets to $US1455 remain in place for the long term.