SAXO BANK: gold price will eventually reach our target of $1,400/oz

18 Jul 2016

“A seven-week precious metals rally has come to a halt with gold and silver both correction lower.The fading Brexit risk and a stronger than expected US jobs report for June helped send stocks and bond yields higher. After creating a double top at $1,375/oz these developments, although somewhat offset by a weaker dollar, helped trigger a healthy consolidation in gold following the surge of recent weeks.Hedge funds are likely to be have been the main sellers just like we saw back in May when a then record long was reduced by one third. During the following five weeks they once again became aggressive buyers. The net-long reached 287,000 lots in the week to July 5, some 53,000 lots above the level from where reductions were seen back in May.So far the retracement has been relatively shallow with gold having found some initial support at $1,328/oz, the 38.2% retracement of the post Brexit rally. Main support however is somewhat lower towards $1,300 a break through which could trigger further weakness to $1,275/oz.The rapid and continued increase in demand for exchange-traded products backed by gold also came to a halt with total holdings falling by 6 tons. This, however, pales against the 132 tons increase of the previous four weeks.The lack of accelerating profit-taking given the extensive increase of long positions since May is a sign that underlying demand for gold remains strong. A bigger correction than what we have seen so far will be required to shake investors out of their current bullish conviction.We are entering the US earnings season and while traders look at equities as the new bonds in terms of chasing yield (dividend), we remain lukewarm on the sustainability of the recent equity rally. On the basis that bond yields will remain depressed for the foreseeable future we see no reason to change our bullish view on gold. Following a period of consolidation we still see gold meeting our target of $1,400/oz.”noted Ole Hansen, Head of Commodity Strategy at Saxo Bank.