Time to Short Gold?

Let’s talk about Gold and how I am approaching it this October. There are 2 broad themes that I will seek to consider in my analysis. The first being seasonality and how it affects the price of gold. The second is technical analysis. Basically, all things considered, I am bearish on the precious metal.

Seasonality

Gold commentators have often drawn our attention to the September seasonality of Gold, i.e. gold prices are, on average, higher in September. Before I get further in-depth about that, I want to go through the demand aspect of gold so that you can understand my proposed reasoning behind the seasonality of gold.

The price of a commodity is influenced by its demand, so let’s take a look at it below:




These figures show that the demand for Gold as an example of luxury goods is very high and one must take that into consideration. Now, take a look at the hard numbers for the price change in gold below:


September has historically been an “up” month 80% of the time, while October was up 60% of the time (with Oct ’03 registering -0.01%). If you are as curious as I am, you will be wondering what the reason could be for this phenomenon. Well, I think that China and India contribute strongly to this demand. India has a wedding season in October followed by Diwali (festival of lights), their biggest holiday. Both these events increase the demand for the shiny metal. As for China, with the Chinese New Year coming in January, and gold as their symbol of luck and prosperity, the demand for gold as gifts would increase.

Technical Analysis

Turning to the technicals, I will start off with 3 descriptive statements of the Weekly charts before I posit some normative conclusions.

XAU/USD Weekly Chart" title="XAU/USD Weekly Chart" src="https://d1-invdn-com.akamaized.net/content/pic681c4a4aafb184893554b1f96c550ba4.png" height="377" width="941">

1. Price is below the 200-day Moving Average

2. A Fib retracement drawn from the swing low of Oct 2008 and swing high of Sept 2011 shows the price hovering over the 50 fib level at about $1,300

3. More recently, I observed a swing low in June this year followed by a higher low indicating possible bullish momentum.

I am currently out of the market for Gold but am looking for signals. Price being below the 200-day Moving Average mathematically indicates to me bearish pressure. Trend traders will be looking for opportunities to go short. I have detected a lot of price action within the $1,300 zone (which has confluence with the 50 fib level) and this is of interest to me, as how price moves from this zone will determine a trading opportunity for me.

With today’s price action threatening the higher low and piercing through the 50 fib level, I would observe this very carefully in the upcoming weeks to see if a lower low and lower high fors on the weekly charts for a potential short.

In the mid-term, a higher low has formed but I will not be mid-term bullish till a 2nd higher low is formed. Furthermore, a head and shoulders pattern with a neckline on the $1,300 zone has formed on the daily chart, which makes it a dangerous long. Take a look at the chart below:

XAU/USD Daily" title="XAU/USD Daily" src="https://d1-invdn-com.akamaized.net/content/picba92267686d44ae0c80885918257a720.png" height="377" width="941">

For those mid-term traders out there that want to trade the daily charts instead of the weekly, this pattern supports my bearish view and there could be an opportunity to go short when this pattern confirms itself.

Reconciling Seasonality with Technical Outlook

Seasonality tells us that most of the time, September and October are bullish months. This is no doubt an important factor, but we cannot ignore the fact that prior to 2011/2012, Gold has been on a solid uptrend except for the brief correction in 2008. I, therefore, will have to pay tribute to the fact that for the first time in almost 13 years, Gold is below its 200-day Moving Average. Any bullish bias derived from seasonality has to be put in check as there is a divergence with the technicals. Having said that, if price in the coming weeks fail to form a lower low on the weekly and push through the 200-day Moving Average, I will not rule out the possibility of a convergence and consequently a more bullish bias.

by Jonathan Suen