– Ilya Spivak: Gold prices edged lower as the US Dollar recovered from post-NFP losses but remained well within their near-term range. Traders were probably reluctant to commit to significant trend progression ahead of the upcoming FOMC policy announcement.
The priced-in probability of a rate hike implied in Fed funds futures stands at 100 percent. This means the increase itself may have limited market-moving potential, putting the spotlight on a revised set of economic and rate path projections as well as a press conference with Chair Yellen.
US economic conditions have been relatively stable since the beginning of the year. Furthermore, Fed officials continue to operate in an environment marred by considerable fiscal policy uncertainty. On balance, this suggests they will opt against major changes in forecasts or rhetoric.
The markets’ response to last week’s jobs data may be a blueprint for such an outcome. The figures sustained the status quo but did not advance the case for a still-steeper tightening path. That registered as a disappointment and sent the greenback lower as gold rose. More of the same may be in store this time.
Crude oil prices dropped to set a new three-month low after an OPEC report showed Saudi Arabia boosted output in February. Kingdom officials said the increase was meant to refill stockpiles and claimed shipments continued to fall but traders still worried that the cartel’s supply reduction deal may be unraveling.
The WTI benchmark swiftly erased intraday losses after API said US inventories fell by 531k barrels last week. Official DOE figures are expected to show a build of 3.25m barrels over the same period. If confirmed, that might rekindle selling pressure while a print closer to the API estimate may give prices a further boost.
The monthly report from the IEA is also due and may offer a contrasting view of February’s OPEC supply trends compared to what was on offer in the cartel’s own accounting. Further evidence pointing to ebbing output cut compliance may spur on the bears.
GOLD TECHNICAL ANALYSIS – Gold prices put in a top as expected after putting in a bearish Dark Cloud Cover candlestick pattern. Near-term support is now at 1181.92, the 38.2% Fibonacci expansion. A daily close below that targets the 50% level at 1156.61. Alternatively, a move back above support-turned-resistance at 1218.90 exposes the 14.6% Fib at 1232.55 anew.
Chart created using TradingView
CRUDE OIL TECHNICAL ANALYSIS – Crude oil prices probed below the $48/bbl figure but failed to hold there once again. A daily close below the 50% Fibonacci retracement at 47.22 paves the way for a test of the 61.8% level at 45.33. Alternatively, a recovery above the 38.2% Fib at 49.11 sees the next upside barrier marked by the 23.6% retracement at 51.44.
– US equity markets (SPY) (SPX) (DIA) (DOW) have been on a high since President Trump’s win in November 2016. Hopes of deregulation, tax cuts, and fiscal spending have spurred the markets, which have risen more than 10% in the last four months.
During a Bloomberg interview, BlackRock’s Global Allocation Fund portfolio manager, Russ Koesterich, stated that equity valuation in US markets is stretched and there will be lower returns over the next three to five years. He also said that if investors feel that tax reforms and infrastructure spending will be pushed back on the agenda, markets could react.
According to the South China Morning Post, Macquarie feels that “equity investors have underestimated the political, trade and deglobalisation risks, whilst over-anticipating the fiscal stimulus potential and the capacity to implement and fund such tax cuts.” It suggests that investors should park some of their money is safe-haven assets such as the US dollar and gold.
According to Bloomberg, Credit Suisse global head of risk advisory Mark Connors believes that “though growth could pick up down the road, valuations may have stretched too far for comfort.”
Legendary investor Bill Miller, on the other hand, has a different take on equity valuation. He said that the equity market is not terribly expensive and that the market might look less expensive on an absolute basis relative to historical performance. However, in the past, we’ve seen that the equity bull market continued as ten-year and 30-year Treasury yields (BND) moved towards 6%. Currently, the ten-year Treasury yield is 2.5%.
Overall, there is a growing consensus that US equity market valuation may be stretched. These levels could be justified with high growth, which would depend on policy decisions, fiscal spending, and tax reforms.
In light of this high valuation, investors could seek other investment options. Gold could be one of those alternatives, especially as inflation picks up. Gold’s strengthening could buoy gold miners such as IAMGOLD (IAG), Kinross Gold (KGC), Hecla Mining (HL), and Coeur Mining (CDE). Miners contribute 4.6% of the price determination of the VanEck Vectors Gold Miners ETF (GDX).
Gold miners (JNUG) are a leveraged play on gold. They can appreciate more than gold prices in the event of an upturn, and vice versa.
– The main concern regarding rising debt is that if it rises beyond a certain point, the country will have to raise taxes and cut spending in productive areas to service its interest costs. Such developments would be negative for economic growth.
If economic prospects aren’t bright, people don’t have many options to fall back on. Gold is one of those options.
The national debt is used to fund past budget deficits. In 2016, the budget deficit rose to $587 million, a 30% rise from 2015. Also, the deficit as a percentage of the GDP rose 3.2 % in 2016, compared with 2.4% in 2015. Debt held by the public reached 77% of the GDP in 2016, the highest proportion since 1950.
US debt rose to $19.5 trillion in 2016, a rise of $1.4 trillion from 2015. Total debt, which includes intragovernmental debt, rose from $5.1 trillion to $5.5 trillion, and debt held by the public rose about $1.0 trillion to $14.2 trillion.
Many market participants expect debt to rise substantially under Donald Trump’s administration. Trump is determined to cut taxes and increase fiscal spending. He plans for infrastructure spending of more than $1 trillion in the coming few years.
A rise in US debt would be negative for the US dollar’s long-term profile. The US dollar affects gold prices, which affect gold companies such as Goldcorp (GG), Barrick Gold (ABX), Yamana Gold (AUY), and Newmont Mining (NEM), and funds such as the SPDR Gold Trust ETF (GLD) and the VanEck Vectors Gold Miners ETF (GDX).
– After Donald Trump’s presidential win, gold and other precious metals came under significant pressure due to the expectation of a better outlook for the US economy.
While such expectations could become reality, uncertainty in global markets is far from over, even after the election has passed.
One of the most important factors that will continue to impact post-election investor behavior will be the Fed’s rate hike trajectory in 2017. While two or three hikes have most likely been priced into the current weak gold prices, the Fed’s anticipated rate hikes could continue to weigh negatively on precious metal prices. This trajectory will, to a large extent, depend on US economic data and the Trump administration’s policies.
As we’ve previously discussed in this series, geopolitical issues such as the upcoming elections in Europe and the rising expectations of a hard Brexit could lead to extended uncertainty in the market. Any anti-establishment win could boost precious metals.
In the medium term, many developments will depend on policies pursued by the Trump administration. However, as we’ve noted, policies supporting higher inflation could boost gold prices. If there’s a trade standoff between the United States and China, China could start building its gold reserves to reduce its reliance on the US dollar, which would again be beneficial for gold.
The above graph shows volatility as indicated by the CBOE (Chicago Board Options Exchange) Volatility Index. Increased uncertainty could benefit gold miners (GDX) (GDXJ) such as Alacer Gold (ASR), Harmony Gold (HMY), Kinross Gold (KGC), and AngloGold Ashanti (AU).
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