Obviously the upside breakout in the gold market today is the result of the spread of the Chinese virus especially with Chinese leadership suggesting the spread is accelerating and potentially expanding its ability to transmit! China has ordered an extension of the holiday (to reduce contact) and has ramped up efforts to contain the spread of the virus in other measures, and while that might retard the infection spread, the impact on the Chinese economy from the scare is becoming more significant and that is starting to ramp up "Global economic uncertainty".
With the gold market this morning sitting only $33 above the level where the initial outbreak news was released, we think the market has significant buying capacity left in reserve. However, the most recent spec and fund long in the gold market sat within striking distance of all-time spec high long positioning of 401,611 contracts from September of last year and that could ultimately limit the upside!
On the other hand, in the event the virus spreads faster and is found to be more than virulent than expected, we suspect gold will see significantly more net longs enter the market and a new record long will be posted in the next COT report.
Restricting the gold market on the upside is the potential for the US dollar to reach up to the highest levels since early October but the impact of currency market action on gold hasn't been as significant as was seen at times in the past. While we doubt the gold market will take direction from classic supply and demand fundamentals early this week, a Chinese news agency recently indicated increased gold trading activity took place on Chinese gold futures markets last year and that could add to the initial upward bias.
Given the flight to quality focus of the markets early today softer than expected German business survey readings overnight might only add minimally to the bull case. In fact, given conditions in the market, we suspect that anything favorable from US new home sales will be ignored and won't discourage safe-haven buying.
We see critical pivot point support in April gold at $1,574.80 with initial targeting levels in the coming 48 hours of $1595.30, $1,619.60 and $1,626.90.
The Commitments of Traders report for the week ending January 21st showed Gold Managed Money traders net sold 3,145 contracts and are now net long 259,190 contracts. Non-Commercial & Non-Reportable traders added 4,727 contracts to their already long position and are now net long 377,525.
Like the gold market, the silver market closed very strong at the end of last week and has extended significantly this morning and that suggests silver has shed its industrial focus and is benefiting from safe-haven conditions. While not near a record spec and fund long positioning last week silver is likely to return to its record spec long with a couple days of noted upside action this week.
The Commitments of Traders report for the week ending January 21st showed Silver Managed Money traders reduced their net long position by 374 contracts to a net long 58,066 contracts. Non-Commercial & Non-Reportable traders net bought 1,990 contracts and are now net long 96,251 contracts.
Critical support in March silver today is seen at $18.18 with resistance/target levels seen at $18.47 and $18.55.
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Non-Reliance and Risk Disclosure: The opinions expressed here are for general information purposes only and should not be construed as trade recommendations, nor a solicitation of an offer to buy or sell any precious metals product. The material presented is based on information that we consider reliable, but we do not represent that it is accurate, complete and/or up to date, and it should not be relied on as such. Opinions expressed are current as of the time of posting and only represent the views of the author and not those of Zaner Financial Services LLC, unless otherwise expressly noted.
