Gold price ripe for a breakout as hedge funds rush for its safety

Gold price is holding close to a seven-year high as hedge funds buy more in reaction to the current quantitative easing policies by central banks.

According to the Commodity Futures Trading Commission (CFTC) the net speculative net position for the metal rose to 262k in the futures market. The number has been on an upward trend since the last week of March, when they reached 258k.

Hedge funds pile in gold

In addition, according to the Financial Times, hedge funds like Caxton Associates and Elliot Management have bought a significant amount of gold. These funds join other hedge funds like Ray Dalio’s Bridgewater Associates and David Einhorn’s Greenlight Capital that are bullish on the metal.

In a statement last month, Paul Singer of Elliot Management said that gold was one of the most undervalued assets in the market. He also said that the current debasement of money by central banks and disruption to mining were clear catalysts.

At the same time, gold miners such as Newmont mining are seeing impressive financial results. In a statement, Newmont said that its profits rose more than 8 times because of the current prices. The company achieved that by increasing its production partly because of its acquisition of Goldcorp last year. This production rose even as the company closed some of its mines in Canada, Argentina, and Peru.

The price of gold has also been helped by a closure of refiners in Switzerland last month. These companies closed their operations to prevent transmission of the coronavirus illness.

This price has been hindered by a lack of demand for the metal from world’s central banks. Just last month, the Russian central bank halted its purchases of gold. Other banks that have followed suit are from Uzbekistan and Kazakhstan. By ending the purchases, gold could see lower demand because these banks are the biggest buyers.

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Gold price technical outlook

On a longer-term chart, we see that gold price declined from an all-time high of $1,920 in 2012. The price declined and reached a low of $1,042 in January 2016. This price was along the 50% Fibonacci retracement level. Since then, gold price has been on an upward trend, and is now a few points below the psychological level of $1800. Also, the price is forming a cup and handle pattern. Therefore, I expect the price to attempt to test the all-time high of $1920 in the near term.

On the flip side, a move below the 61.8% retracement level of $1285 will send a signal that there are more sellers in the market. As such, this movement will invalidate this thesis.

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