13th November - Gold is vulnerable
16 November 2015
TECHNICALS:
Comex Gold Monthly continuation chart
Note the pause at the Fibonacci support.
If that support were to break there is little to look for until the 61.8 level beneath 900.
Comex Gold Dec 15 Daily chart
Short-term, note the completed parallel bear Flag.
Note too the swift test of the Prior Low at 1073.
A break of that low would ratchet the market lower still.
FUNDAMENTALS:
After making all time highs of around $2,000 as a result of the financial crisis/recession that hit around 2008/09, gold has been in a long, slowly-declining phase.
The nature of the sell-off may have given the recent impression that the market has been in a wide trading range for many months. But in fact, since February this year, the market has fallen by around $300.
The move has not been a straight line progression.
As firstly, sentiment about the global economy has ebbed and flowed and secondly, as expectations of a Fed rate hike waxed and waned and thirdly, as China’s economy entered a period of under performance, the Gold price has to an increasing degree tracked the fortunes of the US Dollar.
The US Federal reserve spent much of the early months of this year leading markets to expect a rate hike sometime during the late summer. That offered the Dollar support based on the presumption that the US economy was set to move up through the gears. So traders moved out of Gold ,considered by many as the ultimate hedge in times of crisis.
But, the slowdown in China caused a stock market sell-off and together with a run of disappointing US data, the Fed was forced to delay. Gold enjoyed a minor reprieve. Now the Fed is briefing that policy will be tightened in December after a strong run of data earlier this month, today’s slightly disappointing retail sales report not-withstanding.
The impact on the Dollar has been clear: a solid rally. For gold this meant a lurch lower that leaves it poised for more losses.
Add in the continued weakness of the Euro zone where the ECB is set to ease yet again and the Dollar looks very well supported. In fact, the Dollar looks well-supported against most of the major currencies.
You might ask, if the outlook for global growth has remained virtually unchanged over recent months, why does the Fed now think it safe to start hiking?
Early this month the US produced some strong data: the ISM non-manufacturing survey was much stronger than expected and Non-Farm Payrolls added about 90k more new jobs than expected. But crucially the Fed isn’t about to embark on an aggressive tightening cycle, to the contrary, moves will be small, gradual and well spaced-out.
The motive for hiking isn’t run away inflation. It remains subdued. Nor is the motive over-heating growth, because it remains moderate. The motive is the need to normalise policy after a prolonged period of an exceptionally relaxed monetary policy. Any delay might mean that the magnitude of the move required would pose a serious threat to market stability.
Given the Fed’s intent it will become increasingly difficult, if not uneconomic, for investors/traders to retain their gold holdings. Gold does not pay any income, dividend or implied carry, indeed unless the price goes up, simply staying unchanged is an opportunity cost and that is a major reason why gold is set to sell off.
As the Fed raises rates, traders will buy the Dollar, offering a gain, but that gain will be amplified by buying assets that increasingly offer a better income than can be earned anywhere else. Once equity markets get over the turn in the policy cycle and adjust their psychology, stocks will rally in the US on the growing economy.
Why then would any investor want to have a large exposure to gold?
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6th November - Could Oil go lower?