Strong physical buying interest seems to limit the downside below $1,480

Physical buying continues to provide support for gold on approach of $1,480. However, investors still seem cautious for now as low volumes and generally sideways moves have characterised trading overnight. We maintain our view that gold should be bought on dips below $1,500, given that strong physical buying interest seems to limit the downside below $1,480.

Long term, we expect gold to consolidate above $1,500 soon. We therefore remain bullish on gold. The latest CFTC data (covering the week ended 10 May) shows that net speculative length in gold fell strongly. Falling 75.7 tonnes over the week, this was the largest drop this year. The net speculative position for gold now stands at 684.7 tonnes — down 37.8 tonnes since the beginning of the year. The fall was largely due to a drop of 71.7 tonnes in speculative longs, with
only a modest in speculative shorts of 3.9 tonnes. Although the fall in speculative longs was substantial, given that there were only minimal additions to speculative shorts, we are still reluctant to take this as signal of a market that has turned bearish on gold.

Rather, we see participants adjusting positions, which might lead to some short-term downward pressure, at the worst. Encouragingly, ETF holdings of gold saw a strong increase of 123.1 tonnes over the week ended 13 May. This assures as that investor interest in gold is still relatively strong. Coupled with the strong physical interest we’ve seen below $1,500, this supports
our long-term bullish view on gold.

In terms of data flow today, we would keep an eye on US industrial production and capacity utilisation, as well as housing data. These releases will be watched closely for indications of a strengthening US economy. Better-than-expected results could see renewed dollar strength, as well as a reduction in risk aversion, which would see precious metals on the back foot.

Gold support is at $1,486 and $1,478. Resistance is at $1,504 and $1,513.