Commodity Trade Mantra

Gold Prices Building a Strong Foundation for a Sharp Rebound Leap Ahead

Gold Prices Building a Strong Foundation for a Sharp Rebound Leap Ahead

Gold Prices Jump Above Key Technical Level On Heavy Volume

The last 3 days have been ‘nosiy’ in precious metals markets with gold prices swinging from the best day in 5 months to the worst day in 4 months and now to another high volume surge, breaking the barbarous relic back its 100-day moving-average…

It sems the 100DMA is a key level with heavy volume being used to push gold futures around it.

UBS asks “Is gold establishing a foundation for a rebound?”

Gold longs rebuild while shorts continue to hesitate

Gold prices are holding reasonably well near the highs of the range established in the past couple of months. A few macro factors have been supportive of late: the pullback in the dollar, a pause in the rise in US nominal and real rates particularly on the long end, consolidation in equities, and political and fiscal uncertainty in the US. Latest political headlines out of Europe are probably helping at the margins, although currency moves could complicate the impact. Stepping back from near-term developments, it’s worth noting that the gold market’s correction and subsequent consolidation has generally been orderly. The relatively measured unwinding of positions on Comex from the year’s highs reached in September is a reflection of this. Latest CFTC data shows that gold net long positions have been tentatively rebuilding over the past couple of weeks; at 22.33moz, market net length looks relatively lean around 60% of the all-time high, albeit still higher than the 12-month average around 17 moz. The recent build in net positioning was mainly due to gains in gross longs. Although gold shorts increased for the first time in four weeks as of November  14, volumes were very modest.

Gold resilience helps position the market for a rebound up ahead

A combination of resilient longs and hesitant shorts has helped gold prices form a decent base and enabled prices to climb above some support levels, improving the overall technical picture. As we have previously noted, we think gold’s resilience is in large part due to lingering uncertainty; although macro risks in general are perceived to be lower, there is an acknowledgment that known unknowns and unknown unknowns continue to lurk. Additionally, some seasonal demand is likely also keep gold prices supported. Bits and pieces of interest are evident out of China, although there seems to be no urgency to stock up for the Lunar New Year holidays which will occur later in February this time around. Market participants have also indicated a preference to hold off until after the FOMC December meeting is out of the way. We think gold’s performance of late and the prospect for further seasonal demand to kick in – albeit with unexceptional volumes –should put gold prices in a reasonably healthy position for a rebound above $1300 towards the year-end through to early 2018. Zerohedge

Is a December Rate Hike Necessarily Bad News for Gold Prices?

Conventional wisdom holds that an interest rate hike in December will be bad for gold prices.

But will it?

There is actually evidence the opposite could be true.

Higher interest rates generally boost the dollar. This puts downward pressure on the price of gold. So, one would expect a rate hike to cause gold prices to tank. But over the last two years, the opposite has happened. In fact, we have seen double-digit increases in the price of gold after rate hikes.

So what gives?

The biggest factor is that we generally know the Federal Reserve is going to raise rates long before it actually acts. We’ve heard talk of a December rate hike since July. In fact, analysts say the likelihood of a quarter point December hike stands at 97%.

So, with several months to anticipate a hike, it is generally already baked into gold prices by the time it happens. The market has been factoring it in all along. The Economic Times of India provides a succinct explanation of what has happened over the last two years.

The much-anticipated rate hike is viewed as bearish and so gold prices already face continuous selling pressure. So after the rate hike, investors go for short covering or unwinding their bets and that is where we see the bounce even if the news is negative for gold prices. The rate hike from FOMC is predictable and so any upcoming highly anticipated Fed meeting comes, the deep-pocketed speculators go long on the US dollar and short gold futures. When the rate hike happens, it closes out their trades by buying gold future and selling the US dollar. This prompts the rally in gold prices. This can be seen from the weekly chart when Fed chair Janet Yellen hiked rates in December 2015 and December 2016. In March 2017, the same thing happened.

The question then becomes: Can the market sustain the rally?

That all depends on what investors think the Fed will do next. If Yellen and Company project a hawkish tone, and people think another hike is on the horizon, the “relief rally” will fizzle out pretty quickly. But if the Federal Reserve seems more dovish, and it looks like the Fed will slow the “normalization” process, the rally could extend, leading to more double-digit gains for gold.

The Economic Times article views the Fed as relatively dovish and looks for gold to track upward again after the December rate hike.

The last US economic outlook given by the Fed was positive but Fed was also appearing towards caution and so we expect Fed to remain behind the curve. This gives opportunity for yellow metal to appreciate. So in fact, we expect gold prices to remain under pressure till Fed meeting but after that we expect gold prices to touch $1,330-$1,350.”

TD Securities also expects fewer rate hikes and a weakening dollar on the horizon.

Based on the recent Fed trend of continually dropping its dot plot estimates and ongoing concerns that their models may be mis-specifying inflation, there is a good chance that the world will get less than the four cited rate increases over the next twelve months. This could in turn lead gold traders to speculate that the FOMC may lower its terminal rate projections down from the current 2.75 percent, as low inflation would require low real interest rates.”

There is also the issue of the overheated stock market.

As we reported earlier this week, 46% of investors now acknowledge the stock market is overvalued. TD Securities analysts see the potential for gold and silver to shine due to this fragility in the stock markets.

With equities in record territory and pricing in both low rates and earnings perfection, there will be a growing constituency who believe that there is more downside than upside risk. This historically has meant that investors beef up gold and precious metals exposure as a hedge.”

The bottom line is, the Fed’s next move might not bring about the doom and gloom some investors think. In fact, this might be a good time to buy. – Peter Schiff

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