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False Breakout on Gold?

February 12, 2024
Frank Cabibi

Gold's price broke under a three-month long supportive trend line. Although the break below has the metal down almost half a percent on the day already, there is still a bullish case for the metal for a few reasons.

EdgeFinder Analysis

UJ is bullish at +6 going into the week. The dollar in general is bullish on the EdgeFinder as most USD pairs show favor towards the currency. COT showed institutional buying on the dollar, while indices were sold as of Tuesday last week.

JPY was bought as well by smart money, but the COT score still remains a +1 in favor of USD because of the net long percentages. Analysts are expecting lower CPI on Tuesday for y/y and m/m, but Core is expected to remain unchanged.

Although COT shows buying on the metal while CPI expectations being lower, gold is down over half a percent to start Monday's trading session. Price is going down towards the $2000 psychological level which may be a decent level of support to look out for.

With COT buying and expectations lower, it's hard to tell why gold is dropping as hard as it is today. The VIX (CBOE Volatility index) is up 4.6% on the day too; this usually suggests volatility to the downside for risk-favored assets and could be potentially bearish for gold. The fact that dollar is higher, VIX is higher and gold is down, might be suggesting that there are further risks to the downside on the metal.

What needs to happen for the bullish case for gold are lower CPI numbers than expected. However, the market is acting in such a way that suggests higher CPI. The only way to know is for the number to come out tomorrow.

AU is another strongly favored dollar pair on the EdgeFinder. At -12, it is the most bearish asset as of now as every category except interest rates are pointing to dollar bullishness. Australia's gold-heavy economy has been struggling against the dollar, but is up today.

In a similar case for AUDUSD as gold, CPI needs to come in lower than expected to suggest bullishness for the Aussie. As inflation is still considerably higher above the Fed's inflation target, AU bulls want to see that inflationary trend continue lower each month.

Retail Spotlight

Retail shows more selling on the indices, UJ, while gold remains mixed. The two clear trades on dollar sentiment are USDCHF and AUDUSD to the long side, suggesting that these pairs could actually be bearish.

Smart Money Spotlight

The latest COT report showed us some interesting data on Friday. Risk-off assets such as JPY and dollar were among the top buys from smart money. Gold's net long change, however, mixes things up in trying to determine a clear bias for the week. Risk-on assets such as indices, oil, GBP, CAD, EUR are getting sold.

Fundamental Spotlight

This is the current inflation score for gold as we approach tomorrow's event. You can see two variables that impact CPI y/y's score - location and change- meaning that higher inflation is generally good for the metal, but if the rate moves further away from the Fed target, this may lead to a stronger dollar as interest rates may need to be higher for longer.

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