Gold futures prices edged higher in the middle of the week after experiencing a solid rally on Monday as the Chinese news drove precious metals prices.

 

On Monday, reports in the newspaper The South China Morning Post suggested that Chinese leaders were offering support to some cities and provinces in that they may lift the ban on property developers raising fresh funds. The Chinese government, during the past 24 months, has been attempting to drive down property prices but now have seemed to reverse the course. 

 

Gold futures prices remained strong despite weaker than expected growth data from the EU.  According to the European Union's official statistics agency GDP increased by 0.3 per cent in the second quarter, which was 0.7% lower year over year. It was the fastest quarterly expansion since the first three months of 2011. Expectations were for a 0.2% quarter over quarter expansion, and a decline of 0.8% on an annualised basis.

 

Hedge funds have lined up on the short side of the market, setting gold future prices up for a potential short squeeze.  According to the most recent commitment of traders report released for the week ending August 6, 2013, managed money increased short positions by 14,831 contracts, and reduced long positions in combined futures and options by 2,584 contracts. Longs still outweigh shorts by 119K to 71K total aggregate futures contracts.

 

The recent increase in US yields to 2.71% has failed to outpace the gold forward rate.  By keeping pace, with US yields gold yields are now cheaper on a relative basis, which allows investors to borrow gold, and hold on to long positions for a longer period of time.

 

The October gold futures contract, which is the current most liquid contract, broke out above a downward sloping trend line on Monday.  The trend line connects the highs from June with the highs from July and creates a slope that comes in near 1,315.  Resistance is seen near a horizontal trend line that near the July highs at 1.352.  A close above this level would likely lead to a test of the June highs near 1,425.  Support on the October contract is seen near the 10-day moving average at 1,309.

 

Momentum on the gold futures contract is increasing, as the MACD (moving average convergence divergence index) is printing in positive territory and the trajectory is accelerating higher which is great for gold brokers like Bullion Vault.  The MACD generated a buy signal on Monday where the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. 

The index moved from negative to positive territory confirming the buy signal.  The RSI (relative strength index) which is an oscillator that measures overbought and oversold levels is printing near 55, which is in the middle of the neutral range.

 

* This article is writtern by Marcus Holland from Financialtrading.com