Gold Prices: Keep an Eye!

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The first week of June 2019 has rewarded gold buyers handsomely as gold prices traded at a fresh 2019 high on June 7 before withdrawing to end around 1344 USD. This was following the release of the May US non-farm payrolls report- and gold prices briefly eclipsed the February 2019 high of 1346.61, reaching 1348.13 on their way to their highest level since April 2018.

So what  happens next?

First, Why is Gold Higher

Gold prices rallied substantially between the beginning of the great recession until the Fed begain to unwind QE, moving up to over 1,800. And then in recent years back to around 1000 as risk on rallies returned and  gold was no longer sought after. That could be reversing now.

As stock markets continue to trade near all time highs, but with weakening macros, and an underlying current of geopolitical uncertainty continues – this clouds the outlook for developed economies. It is therefore not entirely surprising to see going prices rallying in recent days.

The immediate confirmation of weak macros came June 7 , 2019: New evidence indicating weakness in U.S. labor markets and rising expectations that the Federal Reserve will be forced to reduce interest rates more than previously anticipated.  The most recent economic report from ADP (private payroll processor) showed that 27,000 people were hired during the month of May versus expectations of 75000.

This is the weakest private employment figure since March of 2010 and it now places the long-term bullish trend argument back into question.

Bullish trends in gold and silver are also being supported by trade tensions between China and the U.S as well as the Mexican  standoff. Estimates suggest that the aggregate impact of the China tariffs, Mexico tariffs, and auto tariffs will knock more than 1% from GDP from the US, the world’s largest economy.

In addition, a dovish ECB meeting, where outgoing President Mario Draghi opened the door to an interest rate cut spurred momentum recently.  Mr Draghi made an inference that interest-rate cuts could be in the foreseeable future for the eurozone economy which is a significant policy shift that amplifies a global trend toward easier monetary policy. This statement is similar to that of Federal Reserve Chair Jerome Powell this week that the Fed could cut short-term interest rates in response to any economic deterioration triggered by trade tensions.

In the meanwhile , US data shows that the probability of a July Fed rate cut has jumped to 85 percent and September to 95 percent.  Also 82% chance of a second Fed rate cut by December.

The Technicals

The 10-day moving average recently crossed above the 50-day moving average which means that a short term up trend is now in place.Near term support on the yellow metal is seen near the 10-day moving average at 1,290 and gold has seen momentum being retained above these averages including moving past the 21 day moving averages.

However, contrarians point out that there have been three instances in which Gold prices have peaked in excess of +2% higher than its daily 21-EMA: like they did last week – The earlier instances were October 3, 2018; January 3, 2019; and January 31 : Another instance occurred since then, on February 19- only four observations in total since the bottoming effort in gold prices began in Q3’18 – the one-week returns for gold after price moved in excess of 2% of the daily 21-EMA were +0.12%, -0.59%, -0.59%, -0.90%, or -0.49% on average, for the respective periods listed above. This might mean that exhaustion may set in soon and prices may drift lower.

This points to a possible challenge to gold in the short term after recent rallies – but then, another indicator is beginning to form a threatening situation: DXY

The Dollar Index, DXY has been showing weakish tendencies – if the DXY Index closes below 97.15 this week it would signal not only the start of a double top pattern pointing towards 95.97/96.00 in the near-term, but longer-term major topping potential in the form of a bearish rising wedge – which would ultimately call for the DXY Index to decline back towards its 2018 lows near 88.25 over the next 16-months. This in  turn can trigger a major rally in gold across the globe as Dollar-denominated commodities like gold tend to do well when the dollar weakens because it makes it cheaper for overseas buyers.

On longer term charts, the yellow metal is showing a rounded bottom pattern and it’s been building a base for the last 5-6 years. If Gold can break above the neckline shown  in the chart below, it will likely cause money to flow aggressively into gold and related. The first target of Gold if it is able to break above the neckline will be $1460 – $1540 area over the next 12 months and then higher towards 1700 USD.

Of course any sudden developments in the China US spat or a sudden eruption in crude prices etc could poke a hole in the upward thrust but one would, basis the mounting evidence on global macros, tend to believe that we are likely to see Gold at much higher levels some months down the line.

Potentially therefore, one might want to look at starting to invest via an SIP into Gold ETFs (Prabhudas Lilladher clients can set up an ETF SIP via our offices or themselves via>products>SIS) or look at buying Gold Funds which invest into ETFs abroad which in turn provide exposure to miners.

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