(Kitco News) - The recent range-bound state of the gold market reminds Phil Flynn of a scene from the movie “Frozen,” where a princess inadvertently uses her magical powers to cast a spell and unleash an eternal winter on the kingdom.
“That’s what I feel like the gold market is,” said Flynn, a senior market analyst with Price Futures Group. “We’ve been frozen.”
Frozen in place, that is.
The most-active Comex August contract meandered between roughly $1,268 and $1,330 an ounce for roughly two months before breaking through the bottom of that band on May 27. But then it proceeded to put in five straight daily lows between $1,240 and $1,243, which now acts as chart support. Short covering set in, and gold since has traded in a narrow band of $1,240.20 to $1,265.50 so far in June.
“Gold is sort of searching for something, looking for some kind of catalyst,” said Frank Lesh, broker and futures analyst with FuturePath Trading. “I don’t know what that catalyst is at the moment and I don’t know that anybody does.”
He said traders are mainly taking short-term positions. “We don’t really have people digging in and establishing large positions,” Lesh said.
He attributed some of the recent gains to short covering, where traders first established short positions, or bearish bets, and then buy to offset or cover them. Sean Lusk, head of commercial hedging with Walsh Trading, said gold seems to have stabilized since last week’s European Central Bank meeting. The event supported the dollar, which is not gold friendly, but also resulted in more global monetary accommodation, which is. He also pointed to some recently improved data from key commodity-consumer China.
“A lot of people were calling for a challenge of the December lows around $1,180 after that last break. But the market held,” Lusk said.
But, he continued, “there are very tight trading ranges. This feels like the middle of August (a time for seasonally slow trade) right now across the board. For the most part, it‘s extremely light volume.”
Flynn said bears and bulls alike are having a hard time generating any momentum in the gold market.
“You can’t break them and you can’t rally them,” he said. “We really have been moving sideways. And I don’t think there’s any surprise why – there’s no fear. Look at the VIX (volatility index). There’s no fear about anything.”
The VIX has fallen to several-year lows. While equities are down so far Wednesday, they have been on a continuing uptrend lately. The Standard & Poor’s 500 stock index futures are near record highs.
“In this environment, there’s not a lot of incentive to drive gold higher,” Flynn said. “So we’re in this holding pattern until something happens…Maybe it’s going to take another crisis or some extremely strong growth numbers to get this market moving…We seem to be bottoming technically, but there isn’t a lot to drive us higher.”
Analysts listed some possible catalysts on the horizon with the potential to move gold. Lusk pointed to next week’s meeting of the Federal Open Market Committee.
“We’ll see a little bit of data the rest of this week,” he said. The list includes jobless claims and retail sales Thursday, followed by producer prices and consumer sentiment Friday. “But nothing is as important as what the Fed is going to say and whether they’re going to be more aggressive…on the tapering (of quantitative easing). Probably not, but traders want to see what is going to happen.”
There is market conjecture that the new Indian government could ease some of the restrictions on gold imports meant to keep the current account deficit in check. If so, that could unleash pent-up demand in the key gold-buying nation, Flynn said.
There is also potential for another flare-up in geopolitical tensions, such as Ukraine-Russia. And if developments deteriorate further in Iraq – where the Islamic State of Iraq and Al-Shams seized control of part of Mosul, the nation’s second-largest city – this could boost crude oil further and in turn help put a floor under gold, Lusk said.
Gold traders will also continue to cast one eye toward equities. The bull market in stocks may have caused some rotation out of metals, with many investors willing to park money it in mutual funds instead, Flynn said. But, a number of analysts have said, a sharp correction in stocks could mean some of that money shifts back into precious metals as investors seek a safe haven.
“The minute you get a little fear in the stock market and get the VIX going up, I think gold is going to be undervalued,” Flynn said. “But I can’t tell you when that’s going to happen. Right now, like I say, the market is ‘Frozen,’ like somebody cast a spell to keep us in a tight trading range.”
By Allen Sykora of Kitco News; firstname.lastname@example.org