Gold Prices Breaks above $1,300; should we take contrarian call?

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Gold Prices Breaks have hit 100-month high as North Korea has confirmed to have tested a new, more powerful, nuclear weapon.
Gold Prices Breaks
One of the contributing factors that have pushed gold above its resistance of $1,300 is the heightening tension between North Korea and US. In 2017, Gold had failed to push above $1300 thrice and now it has comfortably broken and is trading above that level.
Weak U.S. economic data has effectively removed the Fed’s prospective rate rise scenario from the gold price equation. We don’t see an immediate rate hike and the shrinkage of the Federal Reserve’s balance sheet which again augments positive for gold. So why are we thinking of contrarian view when the whole world is excited about gold breaking the barrier of $1300.
It is difficult being a contrarian as it is also one of the riskiest trade. A safer approach indeed is to take profit and move out of the crowded place.
Gold Prices Breaks Here, we had earlier recommended going long in Gold when it was trading around $1280 as we expected gold to trade higher near $1340-$1350. Selling near breakout indeed may cost us some points but at least we are not chasing the price and exciting instead of entering the crowded place. This gives us some safety margin. Everybody is looking at gold after North Korea’s testing of a nuclear weapon.
If the majority have spotted the breakout and are long in their position then who is left to buy? Gold speculators continue to build up their bullish net position and now the open interest is highest this year.
The overall net position is highest since Oct 4th, 2016. The market has not seen such a rapid continuous build-up of long position since April 2016. The buyers were heavily net long before the breakout of $1300 and now with the breakout, there will be difficult to find more purchasing power to follow through.
One of the other reasons for us to take contrarian call is the outflow of gold from world’s largest gold ETF – SPDR gold shares. Usually when gold is added into the holding, the price increases and vice versa but in between June and August, we have seen outflows so that is also one of the conflicting signs that are preventing us in being a huge bullish fan in gold. Short term US Dollar index has tumbled from 103.30 to 92.58 which is 10% starting of this year. US dollar is poised to recover according to technical charts and gold always comes under pressure in rising US Dollar environment.
All this does not make gold automatic short Gold Prices Breaks, but we would certainly not be a buyer right at this moment. We still see Gold reaching levels of $1380-$1385 but before that, a correction should happen. Certainly the present scenario all screams buy in gold but we are taking a contrarian view. The sentiment is frothy and net long position is overly long. The breakout has been on the political scenario which many times have seen fade away. So the rally in gold may come under pressure to test the levels of $1,310-$1,315 before it scales to the level of $1,380.
(Aasif Hirani is the Director of Tradebulls Group. He has 12 years of experience in the finance industry. Views expressed in this article are author’s own and do not represent those of ETMarkets.com. Readers are advised to consult their financial advisers before taking any position based on these observations)

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