17th October - How good is Gold now?
21 October 2013
TECHNICALS:
WEEKLY CHART
The market has found medium-term support at the horizontals from the Prior Highs in 2009 and 2010.
DAILY CHART
The support is clear – as is the major resistance around 1550.
Note too the Fibonacci resistance at 1420.
The market is in a trading range with greater resistance above the market than beneath.
Stand back.
FUNDAMENTALS:
The US Government shut-down made it’s presence felt in many global markets: stocks sold off, bonds weakened and the Dollar traded lower, but what of Gold?
The answer anyone not closely monitoring markets might have given is: Gold rallied. But in fact it weakened during the shut down period despite the risk of a US government default.
Now the risk of default is removed, the debt ceiling raised and the US government working once more, Gold has begun to rally, when an extension of the sell off might have been expected, so why is it rallying?
The government shut down resulted in government employees being laid off without pay. Also companies reliant on government contracts were likely forced to lay off workers too, this will have had a negative impact on the US economy, even though congress voted to back pay those government workers laid off.
The extent of the damage will not be known immediately, in fact most US data due in recent weeks has been postponed, so it isn’t even clear how the economy was doing in the run up to the shut down.
The likely result of this is the Fed will leave policy unchanged, probably for the rest of this year until policy makers feel they have an up to date sense of how the economy is performing.
There is a risk that the economy did ok and the Fed delaying the start of its tapering policy might be detrimental to long term inflation prospects, but we don’t see that.
Gold is probably rallying for the same reason that European Bonds are and US Treasuries are not. Investors are diversifying their portfolios. In other words, they are selling some of their US Treasury holdings and moving into European Bonds such as the Bund, Gilt and Gold.
Moreover, foreign governments with massive reserve holdings of US Treasuries are doing the same. The Chinese and Japanese governments hold Trillions of Dollars of US Treasury bonds and were clearly concerned about the security of those assets during the government shut down.
On more than one occasion Chinese and Japanese officials said the US needs to get its house in order. Now the risk of default is passed, they probably see this as a good opportunity to move some of their reserves out of US debt and into other assets.
Additionally, the risk of default is only delayed until the new year, since the debt ceiling expires early in the new year and unless Congress and the President have by then devised a policy that is mutually acceptable, the whole circus of government shut down, fear of default and last minute haggling could be replayed all over again.
So is gold about to embark on a new bull run? We don’t think so.
The current price action is likely a correction driven by portfolio diversification. Clearly investors/foreign governments will only move a limited amount of their reserves out of Treasuries and once that process is over gold is likely to resume its decline. The next few week will likely send out conflicting signals as the US releases a couple of weeks worth of delayed data, including non-farm payroll, but this data is largely out of date. In a couple of weeks a new raft of up to date data will be released, only then will the fog begin to clear and rational decision making become possible.
So the current price action is a correction not a new bull phase.
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