Gold Price Outlook: Can Quiet Accumulation Trigger a Breakout?

Gold has lost nearly 30% from its January record high, yet bulls continue to defend support around the 4,000 area. While the broader trend remains bearish, improving futures positioning, firmer options sentiment and constructive price action suggest quiet accumulation may be underway, raising the prospect of a bullish breakout.

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Quiet Accumulation Could Be Setting Gold Up for a Breakout

Gold prices have lost just under a third of their value against the US dollar since reaching their last record high in January. The bearish trend remains well established, although bulls have done a great job of defending the 4,000 area since late June. This begs the question of whether bears are merely pausing for breath as they await a bearish breakout from a classic trend consolidation pattern, or whether we are instead heading towards a bullish breakout. I am leaning towards the latter.

Gold Futures and Options Point to Mild Accumulation

The weekly gold futures chart shows the sideways range it has traded within over the past few weeks. Yet subtle clues of bullish accumulation appear to be forming. Risk reversals are moving higher, suggesting demand for calls is outpacing demand for puts. Put differently, demand for downside protection is now lagging despite prices failing to move lower. Furthermore, net-long exposure among asset managers has been trending higher overall since late April. Granted, it was a touch lower last week, and bullish bets among large speculators have declined over the past three weeks. Still, overall, gold futures traders are more bullish than they were a couple of months ago.

Source: COMEX, CFTC (COT), LSEG

Gold Bulls Defend 4,000 as Momentum Improves

The daily chart shows a strong gap higher from Wednesday's close around the 4,000 area. The fact that there were so many failed attempts to break decisively beneath 4,000 before this gap higher suggests to me that gold bulls have been quietly accumulating around these cycle lows.

The 1-hour chart shows price action drifting lower in what appears to be a corrective move, while a double bottom has formed above the gap support. With prices now attempting to extend gains from the monthly pivot point, bulls may be targeting a move towards 4,200. If the US dollar is forced lower alongside the Japanese yen in the coming weeks, it could also allow gold to break above the monthly R1 pivot and head towards the 200-day EMA around 4,300.

Source: COMEX, CFTC (COT), LSEG

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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