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'Buy gold price dips with conviction,' says Orchid Research

Kitco News

(Kitco News) - Despite this week's price drop, gold has more room to the upside and will benefit in the aftermath of the U.S. election amid the COVID-19 uncertainty, said Orchid Research.

"Even though gold's positioning is heavily long, we think that it has room to become even longer in the weeks ahead, judging by our dry powder level analysis," Orchid Research wrote in said in a Seeking Alpha post on Wednesday. "We think that the aftermath of the U.S. elections will continue to elicit heightened uncertainty, in a context in which additional stimulus measures are needed to fight the COVID-19."

The post-election scenario involves macro uncertainty, more stimulus, and rising coronavirus cases, all of which are supportive drivers for gold.

"This should drive the dollar lower (even though its positioning is already short) and U.S. real rates lower under downward pressure. As a result, we expect investment demand for gold to remain strong over the short run, pushing gold prices higher despite the unsupportive price seasonality in November," the post said. "While we acknowledge that dollar's spec positioning is heavily short and that the seasonality of gold prices is not necessarily supportive in November, we expect the appreciation in gold prices to continue."

Orchid Research advises buying price dips in SPDR Gold Minishares (NYSE: GLDM). "Our trading range forecast for GLDM over a 1-month view is $18.00-21.00/share," the post said. "We buy the dips with conviction, expecting GLDM to reach $21 per share over the next month.

The current positioning in the gold space is heavily long, but the market has room to add to those longs. Here is Orchid Research's analysis:

"One way to determine how longer the positioning in the gold market can become is to analyze the dry powder level among money managers (i.e. speculators) in the CME gold futures market," Orchid Research wrote. "To do so, we distinguish money managers that hold long positions (MM longs) and money managers that hold short positions (MM shorts). For each category, we identify the number of traders reported by the CFTC. We plot this information in the following visualization."

"We can see that the number of MM longs (currently at 100) is not at an extreme high. This suggests that there is sufficient dry powder among this trader category to push gold prices higher in the near term," the post added. "Our dry powder analysis suggests that gold prices may move higher in the weeks ahead and months ahead."

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