Welcome to 2020, a year in which the President of the United States conducts war via his Twitter account:
Regardless of how you feel about President Trump or the US/Iran situation, the fact is that things escalated a great deal over the weekend after a US airstrike eliminated Iranian General Suleimani on Thursday night in Baghdad.
This dangerous escalation of posturing between the mightiest military on the planet and a country of more than 80 million people which also happens to possess formidable conventional and unconventional military capabilities could have potentially far reaching financial market implications.
With Middle East equity indices already down between 3% and 5% I fully expect S&P futures to open lower Sunday night. Gold futures and crude oil futures could also rise sharply in thin Sunday night trading as scared short sellers are forced to close out losing positions.
My interest is in gold in particular. Turning to the monthly chart we can see that gold ended last week right at previous support from 2011-2013:
Gold (Monthly)
There is layer of resistance stretching from the September 2019 peak at $1565 to the April 2013 high at $1604.30. If gold gaps higher into the teeth of this resistance it should make for an interesting week of trading which is likely to be characterized by higher volatility and higher trading volumes. Gold sentiment is running hot after a more than $100 rally over the span of five weeks. In addition, positioning among gold futures traders is also at an extreme with commercial traders (producers, swap dealers, etc.) in gold futures holding their largest net notional short position on record (more than US$50 billion):
Technically speaking, gold is getting a bit overheated on shorter time frames (daily, hourly, etc.). However, on the weekly and monthly charts the gold party could be just getting started after a 6+ year bottoming process that only transitioned into a nascent uptrend six months ago.
Nobody knows how the US/Iran situation is going to unfold, but one thing is for sure and that is that it's a scary situation which has the potential to get a lot worse before it gets better. If there was ever a time to own gold it would be now, and perhaps that is why we should take standard sentiment/technical indicators with a grain of salt. Judging by the massive commercial short position in gold futures the yellow metal is in the midst of a massive short squeeze - short squeezes can often reach crazy extremes before experiencing a reversal (only once the most leveraged short players have been forced to cover at the highs). This may be what is about to unfold in gold.
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