Central Banks Remain Adamant

Pace of change from the developed economies are taking headlines ever since the beginning of 2015. US Federal Reserve Chairwoman – Yellen wants to bring about normalisation into the economy and often cited the intention to do so depending on the economic data. Meanwhile, her counterpart at the BOE – Carney has not budged away to mention the gradual increase by the bank as early as next year.

The US will have the first stab at it and the Fed do sound confident despite at times portraying an indecisive decision. Now that we are entering September, dollar bulls have lined up for the good news to happen despite a fall in the % of analyst view that Miss Yellen will do the rate hike. Fischer’s comments at this week Jackson Hole also suggest that the US will see inflation soon which should allow a gradual interest rate hike.

So what does this all mean to precious metals? One would have thought that the prospect of a rising inflation could mean higher gold prices. Historically, the chart above paints a stark difference – if we look at 1990s and early 2000, a gradual rising rate does not bring much benefit to gold. In fact, the yellow metal has a rather dull unchanged price action. It is only at the extreme economic events of 1970s and 2008s do we see an explosive rise in the price of gold. Notice, we now have a divergence given the 2 different economic events that central banks have to deal with.

During 1970s economic crisis – a rising rate and gold prices come hand in hand to battle with rising inflation. While the 2008s financial crisis has brought inflation down to its knees as global demand sapped and not only we have to acknowledge the global economy is oversupplied but was and is battling with deflation.

If we learn anything from history, the global financial crisis of 2008 is an unprecedented one – yet it has the resemblance of 1929 in some ways. Please note that we bear no intention to always post a negative view of the global economy but rather shed a light into what often the other side of the arguments. Fair to say it is a precautionary view on what may happened if the sh*t do hit the fan. Our argument remain balanced on the view that Central banks will not let this happen, thus market complacency can remain high which further explain why global debts will continue to spiral out of control.

“Understandably, the global debt will and need to continue higher in the hope that it will “eventually” trickle-down to the rest of the economy. Central banks are fast running out of option and tools to revive the ailing global economy but the resistance must go on. It will not surprise us that during Miss Yellen tenure as the Fed chairwoman – that she will consider another quantitative easing AGAIN!”

The month of September is often turbulent yet there are opportunities lying abound – one has to look for it but do thread the market cautiously as we have the VIX index at the high as we enter into the new month.

Dollar Technical Outlook

Well, it was a massive reallocation of dollar after 4 weeks of selling. We saw a massive recovery in the dollar index as we head into the end of the month. Almost wiping out the entire negative vibe – bullish engulfing candle from last week is a testimony not to mess with the dollar bull. The other message that it is sending is that the rate hike is imminent and positioning for this is in process and one must not discount that we could still see higher prices next week. However, please take note of the seasonal charts below as it paints a potential warning for the strong dollar.

We have a higher low and with price action trading in a larger ascending triangle pattern – we cannot rule out a test on the upper trend line at 12050 - 12100 levels where we would look to short the index. One has to respect the purple descending trend line as well since it worked as a strong resistance on the dollar index.

“Technically, the dollar index should find some relief buying as it has reached an important juncture.Price action has spiked out of the megaphone pattern and this means more trouble ahead. A retest on the break out level may be the least of a dead cat bounce but never discount that it could revived IF talk of rate hike is back on the table.”

Gold Technical Outlook

Gold did pullback as mentioned in last week commentary:

“We are now looking for a pullback in the price of the yellow metal after an impressive run. Tension and uncertainty in the market with the selloff in the dollar index has certainly helped gold to rocket higher. However, we cannot ignore the fact that we are near resistance zones and potential reversal zone.”

The weekly chart says it all here as price action hit resistance on the red trend line – price found 20 wma as resistance after the first and second try but later found support at 1120 levels which si the 50% fib retracement move from the low 1061. We are impressed with the corrective move on gold prices and this is a healthy market that is pulling back technically. We are not ruling out a retest lower for support and If price bounced off the 1100 level then we could be in store for that inverse head and shoulder.

However, we have to be cautious too as the daily chart is potentially forming a head and shoulder pattern as well.

Silver Technical Outlook

So we have a hit and miss on our expectation on this volatile metal – as usual the price action on Silver is often exacerbated and the industrial metal suffer as the Chinese economy reflected a much heavier slow down. It was also a technical move as Silver found a strong double bottom as buyers step in at 13.90 levels which held the sell off last November 2014. We could argue that this is the floor for the white metal so sellers beware – while pullback looks as a decent medium term investment. Weekly RSI has bullish divergence, China managed to avoid severe depression as of now – extra stimulus has been pumped in – seasonal demand for end of year should kick in – bargain hunters should take advantage of this.

“We have seen the yellow metal has a 2nd green week on the candlestick – more often than not – pullback is due. Watch the daily Silver chart as the RSI is heavily diverging here and it could be an early sign that we see pullback both in gold and silver next week. Key level of support will be the 20 DMA again and we will not be surprise to see price break below and buyers need to step in then.”

Platinum Technical Outlook

Daily chart has a resistance at 1030 levels and early next week could see Platinum retesting it. Failure to break above means further consolidation and a pullback may be the best option before mounting a serious run higher. With prices still trading above the 20 dma, we felt that there is further room higher for now. It is important for the bulls not to have prices break below 970 levels.

Palladium Technical Outlook

A weekly hammer candlestick and Palladium may have finally flushed out all the weak longs – the RSI is worth mentioning as we may finally have a clear run higher from here on. Technically the chart is damaged but we cannot ignore the potential bullish reversal price action here. A retest lower is still possible before we see an major recovery.

“We have the bounce in Palladium but the sudden gapped lower left many questioning about this bounce. Price action went close to our target zone but for now, we may well get to our previous weekly zone of 577 levels.”

Weekly

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