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19th December - How much lower for Gold?

19 December 2016

TECHNICALS:

 

Monthly Gold futures continuation chart

The rally from the lows at the end of 2015 has struggled over five months to break the downtrend resistance established since the 2011 high of 1915$.

There has been a sharp sell off since the US election.

But 1034 is powerful support from the Prior High in 2008.

Weekly continuation chart

Just prior to  Trump's election  we were bearish because  the market had broken down through the

band of Prior High supports 1283/1305.

The week of the result saw a dramatic bull surge which collapsed almost immediatly.

A weekly Key Reversal was established and, simultaneously,

a bear Head and Shoulders Reversal  was completed.

The minimum target for the H&S pattern is 1090.

So the market has further to go onthe downside suggesting a test of

the 1034/1045 area of support.

FUNDAMENTALS

The election of a new US President is always a time of uncertainty. What a candidate says on the campaign trail, isn’t always delivered when in office, due to the way the US system works, usually because the President’s party may not control either one or both houses of Congress.

The election of Donald Trump has given rise to even more uncertainty that usual. The party he represents controls both the House of Representatives and the Senate, but the policies he put forward when campaigning drew little or no support from his own party. Quite often out there was outright opposition. Add in the fact that Trump has no experience of political office, either as a Congressman or Senator means US politics really is entering a new era.

Aside from the people Trump has picked for key cabinet posts, most of whom oppose much of what out-going President Obama stood for, Trump himself has threatened to pull the US out of NAFTA, the recently agreed Pacific trade pact and the Paris climate accord. He also wants to pull out of the deal struck with Iran designed to stop Iran building a nuclear weapon.

On the domestic front he wants to cut corporation tax from 30% down to 15%, spend untold amounts on rebuilding infrastructure, including repairing roads, bridges, hospitals and schools . All of which, while worthwhile longer term, will grow the budget deficit and fuel inflation.

The Dollar looks set to enjoy a strong rally as a result and we have already seen the beginning of that move since Trump won the Presidential election.

But his policies have implications for monetary policy too. Clearly if inflation is going to turn out to be higher than the Fed previously forecast, interest rates will need to move much higher. Before Trump won the vote, it was assumed that US interest rates could settle around 2.5%, that now looks much too low.

If Trump does all he says, then the Fed will need to completely rework its forecasts and interest rates could be heading back up to around 4% or more. That would clearly have implications for the strength of the Dollar. A reinvigorated US economy with strong growth, but with higher inflation will set the US apart from other leading economies where growth remains sluggish, inflation low, non-existent or subdued with interest rates still set at very low levels. Why wouldn’t you buy the Dollar?

The consequences for Gold then are clear. Gold is set to trade much lower over the medium/long term. As an asset class that thrives on periods of financial or geopolitical crisis, those dynamics look set to be removed under Trump . From a Geopolitical point of view Trump has picked someone for US Secretary of State who has a close relationship with Russia’s President Putin. Does that mean a true reset of relations between the US and Russia, which would sweep away sanctions and open up a new era of understanding?

In any event the period of cheap Central Bank money looks set to end very soon, the Dollar looks set for a long rally and Gold looks set to travel in the opposite direction faster than the Dollar might rally due to the US moving back towards a position of monetary policy normalisation and growth driven by much-needed infrastructure spending.

In short,  despite the uncertainty surrounding many of his policies, the economics of Trump's incumbency look clearer and clearer: the period of cheap money arises out of financial crisis that has for so long underpinned gold looks set to end.

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20th October - Has Sterling found a new equilibrium?

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