Interesting price action on Gold last week. A few years back, one could have concluded that it was behaving like a risk asset. Indeed, the 50 USD/oz move on Gold since early May (first chart in the mosaic below) coincided with further acceleration in the countertrend up on EUR/USD (second chart) as well as with a rally to new highs on the SPDR S&P 500 (ARCA:SPY) (third chart, the SPDR S&P500 ETF).
The common denominator, though, would be interest rates (fourth chart, 2 Years Interest Rate Swap rates). Indeed, uncertainty about growth prospects for the US economy is rising and the anticipation of an imminent rate hike seems to be moving away.
Indeed, as shorter term market interest rates (2 years tenure) correct down and growth prospects become less certain, the opportunity cost of holding gold diminishes, both financially and economically. This is also the case for EUR/USD which had been driven down by the differential in growth prospects and monetary policy between the US and the Eurozone.
Finally, US equity markets seem to be experiencing some sort of relief rally as the prospects of a rapid rate rise move out in time. So it is an interesting mix: rising Gold, rising EUR/USD and rising US equity markets. We will first look at Gold’s current technical picture. Let’s start with the Daily chart which gives the trend perspective over the next few months.
Gold: Daily chart
Despite the recent rally, the Daily chart on Gold still shows a negative trend. The price projection, which is labelled as a correction down (in grey colour), acts as a countertrend to the January upside breakout attempt. Targets down for this corrective projection seem to have been achieved (“C down done”). The trend is now waiting either to reverse up or move below 1’188 USD/oz to reconfirm an impulsive downtrend. The base created since the bottom in November does seem quite promising. Prices retested down in March without making new lows.
FinGraphs’ Risk Index, which has had several Oversold episodes, now seems to be rising. There has been a lot of talk in the market about the 1’225 USD/oz level we went through this morning. It is the 50% retracement level of the January to March attempt to new lows (1’300 to 1’150) and as such, it may constitute a strong trigger point. It may sound a bit obvious, yet after three years of a bear market, it is worth considering.
Let’s now turn to FinGraphs Investor’s View to gain more perspective and weigh up the situation over three investment time frames: Weekly, Daily, Hourly or the perspective over the next few Quarters, Months and Weeks.
Investor’s View on Gold:
The Daily (middle chart), as we have already seen above, is in a correction down. It has achieved its targets and may be waiting to reverse back up. The Hourly (right-hand chart) would confirm further short term upside. It is in an impulsive uptrend and targets are pointing to a possible range between 1’231 and 1250 USD/oz. The Weekly (left hand chart) reminds us that the longer term trend is still heading down. Its possible Impulsive target range (red projection) could still have some way to go, both in terms of price and time.
The Risk Index, although it is approaching the Oversold zone, is not in exaggeration yet. So yes, the breakout today above 1’225 USD/oz is promising, yet the long term downtrend should continue to prevail. We believe there are several resistance levels above 1’225 USD/oz which would need to be cleared before the Weekly downtrend could be questioned:
1’250 USD/oz: which stopped the rally last October, after serving as strong support in early June 2014
1’260-65 USD/oz: or the upper end of FinGraphs’ Daily corrective targets up if the Daily trend was to turn positive (calculation based on current volatility). Moving above these levels would probably trigger a Daily impulsive move up, a situation which could cast doubt over the Weekly downtrend.
1’300 USD/oz: psychologically, this is where the January 2015 correction up stopped. Moving above it would confirm a possible breakout, out of the current base.
Hence, even if 1’225 USD/oz has been reached, we believed more upside momentum is necessary to consider a longer term reversal. On the contrary, if/when prices move back below 1’188 USD/oz (the lower boundary of the Daily corrective targets down), a resume downtrend possibly to new lows would be likely.
Let’s now consider the recent chain of events as it may provide further insight into the dynamics at play for Gold.
It’s all about the Fed’s tightening credibility:
By nature, Gold acts as a wealth preservation mechanism. This is especially true when monetary policy becomes too accommodative. Quantitative Easing in the US strongly supported Gold’s exponential uptrend to its 2011 top. The reverse logic is also true, and the launch of tapering (i.e. the gradual reduction in QE) was the trigger behind Gold’s subsequent fall in 2013.
Today, Gold provides a possible reality check on the state of the cyclical upturn. When the US economy is deemed strong enough to sustain the upcoming FED rate hikes, Gold is kept under pressure. On the contrary, if economic growth does start to decelerate, the rate hikes would then gradually be postponed and Gold would act as a safe haven. Given the weak string of recent data, it is already starting to happen.
Could this be the start of a reserval of Gold’s long term downtrend? In a way, it’s all about the FED’s credibility and aptitude in timely delivering its tightening strategy.
The Daily Mosaic below is revealing of this relationship. It looks at the Dollar Index (Chart1), the EUR/USD (Chart 2) and USD/JPY (Chart 3) exchanges rates and compares it to the price of Gold (Chart 4):
Gold is quoted in USD. Hence, it is interesting to note that despite the huge move up for the Dollar vs the Euro and the Yen from early November 2014 to end of January 2015 (anticipation of QE in the Eurozone and Abenomics 2 in Japan), Gold was even stronger. Indeed, during this period, it managed to rise almost 200 USD/oz, from 1’130 USD/oz to 1’300 USD/oz.
This dual uptrend (Dollar up, Gold even stronger) was revealing: despite all the talks about diverging central banks policies and possible rate hikes in the, the FED, at the time, still lacked credibility in its tightening strategy. In fact, the Dollar was rising versus other currencies, yet it was declining versus Gold, the ultimate wealth preservation currency.
This situation ended on January 28th2015 with what appeared to be a hawkish FED statement: the US economy was expanding at “solid pace” and investors needed to be “patient” on rates hikes (i.e. “rate hikes were imminent, it was only a matter of time”). Gold then started to correct down and by mid March was back near its lows at 1’150 USD/oz. Recently, the FED has turned more dovish again. It is now “data dependent” following recent negative releases. Naturally, Gold is making a comeback.
As we have highlighted in previous papers, 2015 is all about the US economy and its capacity to sustain and follow through with the planned rate hikes. In a way, Gold has also become very much data dependent too, just in the opposite direction.
We will hence look to the FOMC minutes this week with great interest. We will also focus on any data release and FED statements in upcoming weeks. We will also watch the levels mentioned above to see if they can be taken out.