Gold Forecast: Bullish Bets Squared Off Ahead Of Fed, Sell On The Rise?

The preliminary data for Gold September options published by the CME shows that investors have squared off bullish bets ahead of the FOMC rate decision.

Source: CME

• The open positions in the Calls dropped by 1041 contracts on Tuesday. More importantly, in the money [ITM] calls shed 816 contracts. 1.13 Call options saw an unwinding of 848 contracts.
• Clearly, investors are worried about a further sell-off in the metal. The fact that the out-of-the-money puts added 429 contracts corroborates the view that the metal is likely to dip below the psychological level of $1300.

Technicals - Sell on the rise

Daily chart

Despite the recovery from the low of $1204 to $1315, the outlook remains bearish as:

• The metal still trades below the rising trend line
• The 14-day Relative Strength Index (RSI) is at neutral levels, but sloping downwards
• Five-day and 10-day moving averages are sloping downwards

Short-term view

• The ongoing recovery could be extended to $1330 levels on a dovish Fed, although the upticks are likely to be short-lived as suggested by the technical factors listed above.
• The metal looks set to test sub-$1300 levels. The sell-off could happen if the Fed policy statement and Yellen indicate scope for another rate hike in December.

Note: Gold is positively correlated to the size of the Fed's balance sheet. Hence, the yellow metal is more likely to drop below $1300 levels if the Fed commits to a starting date [October] of the balance sheet unwind.