9th March - Gold is looking vulnerable
13 March 2017
TECHNICALS:
MONTHLY GOLD FUTURES CONTINUATION CHART
Support is clear at two levels the Prior High 1033 and the 50% retracement of the bull run just beneath 1100.
A band of support has been created.
The market has bounced of that support once - is it about to retest it?
GOLD WEEKLY FUTURES CONTINUATION CHART
Note the failure of the recent rally since November to break the resistance from the Prior Low at 1242.
So the bear trend remains solidly in place.
Note too, the moment of failure at 1242 was accentuated by a weekly Key Reversal ( a higher high and lower low established inside a week ending at the low)
The bear momentum is established.
A revisit of the supports tested in November 2015 looks likely.
FUNDAMENTALS:
The gold price has proved remarkably resilient over recent years. After the initial sell-off from the heady highs made during the financial crisis, it has continued to attract buyers seeking a hedge against lingering doubts about the robustness of the global economy, that have kept Gold in a fairly broad trading range.
Those concerns were derived from weak economic growth in virtually all the major economic areas, despite monetary policy being set at extremely loose levels which included aggressive QE programs in the US, Japan. UK and the Euro zone.
Since the mddle of 2016 the US has produced growth deemed strong enough for the Fed to begin slowly tightening monetary policy, but other economies have faired less well. Euro zone growth has begun to firm over recent months, with CPI moving back up to 2.0%, but the ECB remains committed to its QE program and apart from Germany, the other big economies of France and Italy have continued to struggle generating growth much above 1.0%.
The UK had stood out as a strongly-growing economy. But after last years BREXIT vote, a period of economic under-performance remains on the cards. Then there is Japan. An economy which suffered lost decades of growth, dogged by deflation, has in recent months seen CPI turn positive, but at only 0.4% year on year, it is still to early to declare victory over deflation .
But the US has elected a President with an economic program intended to boost US growth. His policies include a defence build-up, infrastructure spending and measures to encourage business to repatriate “lost” well-paid US jobs.
All of this comes at a price, which will be bigger budget deficit and rising inflation. In his recent speech to Congress, President Trump restated his policy ambitions and he has since said the extra US$54.0B he wants for defence will come from budget cuts else where, but that doesn’t look too credible.
In reality, if he is able to implement his policies, the Fed will likely become more aggressive with monetary policy as it tries to cap inflation. The combination of hoped for faster growth and tightening monetary policy will ultimately feed into the Dollar which we expect will enjoy a strong rally against the other majors.
Naturally, all the above will have implications for Gold. Trump’s policies of military build-up and infrastructure spending will clearly result in faster economic growth, create new jobs and eventually improve productivity.
Investors will want to buy Dollar assets. Stocks related to companies and sectors involved in his spending spree will rally, bond yields will rise as the budget deficit expands, inflation rises and the Fed tightens and the Dollar will rally as investors seek to buy in.
The implications for Gold then are clear: it will trade lower. Since gold offers no return other than a capital gain, the allure of other assets will be hard to resist. And since Gold benefitted from the fall out from the financial crisis, which resulted in ultra low yields and sluggish global growth, its usefulness as a hedge will have run its course.
In summary, we are bearish of Gold. As Trump begins to roll out his policies others will be too. The Fed holds its FOMC meeting next week and a rate hike is almost certain, but watch what they say in the policy statement, any hints of a more aggressive policy stance will feed directly into the Dollar and weigh on Gold.
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23rd March - How weak is the Dollar? 
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23rd February - What is driving the Bund up?