Gold analysis: Is the tide rising now?

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Gold has risen 5.5% from its July 21 low of $1,680 per troy ounce, as market sentiment suddenly shifted to safe-haven assets in the aftermath of a slew of recession-risk events and rising geopolitical tensions between the United States and China over Taiwan.

According to the latest Commodity Futures Trading Commission (CFTC) weekly Commitments of Traders (COT) report, gold net speculative positions increased by 34% to 124.3K contracts on the week ending August 2, up from 92.7K the previous week.

This marks the largest weekly increase in gold net speculative positions this year. Speculators' positioning on gold has consistently declined from a peak of 274.4K in the first week of March to 92.7K at the end of July, the lowest level since May 2019.

Despite this uptick, gold's positioning still remains quite weak, implying that a shift in sentiment toward gold could result in significant upside price pressures.

Looking at technical indicators, the 14-day RSI recently broke above the 50 mark, also rising from severely oversold levels, indicating that bulls have gained the upper hand in the short-term momentum.

Last Friday, however, the release of the US labour market report weakened gold's price momentum slightly, as both non-farm payroll (528,000 vs. 250,000) and hourly wages (5.2% yoy vs. 4.9% yoy) soared far above expectations, causing a repricing of Federal Reserve rate expectation to the upside. However, unlike past Fed rate repricing episodes in May and July, this one did not result in a massive gold's sell-off.

Consequently, this could be an early sign that the negative relationship between gold and the Fed's expected interest rates is beginning to dwindle. If this narrative gained further traction, gold would resume its traditional function as a hedge against inflation.

Another print above expectations (8.7 percent year-over-year) would certainly prompt Fed rate responses, but also raise further doubts that this inflation can be tamed through rate hikes, potentially weighing on the dollar and favouring gold.