Special Focus: XAU/USD Golden Cross

Everybody’s talking about Golden Cross (Daily SMA 50 and SMA 200) of XAU/USD which just produced a bullish signal after the QE3 announcement.

Is it really that profitable? Let’s take a look at the recent signals that the Golden Cross has given us:

We can see 2 losers and 1 winner, and the winner in April 2012 did not really have a strong follow-through. Putting it simply, the gains made were not enough to compensate losses from the 2 losses. However this assessment may not be fair as Gold was stuck in a consolidation phase between Sep 2011 to May 2012. When you are in a consolidation phase, Moving Average Cross strategies lose their effectiveness, golden or not.

Therefore, a more pertinent question we should ask ourselves is this: Will Gold break away from the consolidation range between 1,500 to 1,800?

Looking at CFTC’s Commitment of Traders Report, we can see that Non-commercial longs have pushed up higher significantly, but not at 2008 – 2010 levels which saw tremendous increase in Gold prices. If we want to see Gold breaking higher, volume must support this rally. As COT is published every Friday, keep a look out on tonight’s report as it will cover this Tuesday’s position data, which will be a good indication of Post QE3 ratios.

OANDA’s open positon ratios showing similar trend: Increase in longs not hitting previous highs.

Perhaps it is too early to tell? But based on current volume data, it seems to suggest that people are not really buying into Gold after QE3.

Bottomline: Hard to see Gold breaking higher based on current volume, but volume may eventually pick up as Fed continues to buy $40 billion of MBS each month.

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