Last week I noted Gold’s test of the resistances just over US$1200, now we’ve seen long held support come under pressure this week. This all stemmed from last Fridays much watched US employment numbers which exceeded estimates, driving up expectations that the Fed would move sooner rather than later to increase interest rates. The resulting speculative jump in US dollar saw Gold fall below long held support around US$1175, which in turn triggered protective Sell stops placed just below this key level, spiking prices to US$1162 lows. Gold had declined in four of the five sessions last week as US data gradually confirmed the Federal Reserve recent minutes, which said declining first quarter growth was due to temporary factors like the unseasonably harsh winter. The Fed removed all calendar references in its forward guidance and said that recent economic weakness might be “transitory” in nature. This means that bank is now entirely dependent on data so a rate increase could happen at any future meeting.
Meanwhile in Greece, the country delayed last Fridays 300-million-euro repayment to the IMF until the end of June, increasing the risk of a Greek exit from the bloc. Concern over this situation however has failed to propel interest in gold. With investor sentiment for gold so weak, gold prices may well continue lower but I feel this is leading to a better buying opportunity. And given developments in Greece and with the potential for corrections in other asset classes, it may not be too long before the markets start looking for a safe haven again.
As for Silver, this has dropped below the $16 mark for the first time since May 1 and has struggled to regain and hold this level. Currently we’re sitting just below that at US$15.968 per oz. Technical charts indicate that we’re sitting on an ascending support line, which originated in March of this year. Silver should be viewed as oversold and therefore valuable to a corrective bounce. I’m a buyer of Silver at these levels with a protective Stops at 16.87.
Silver again out-shined with a 3% gain, Palladium + 2%, while both Gold and Platinum traded 1.5% higher from the same time last week.
Trading hasn’t been without some trepidations, bullion traders once again closing positions into the weekend. Fridays have now become renowned for this mass exodus of risk. Gold sinking to six week lows, breaking below $1,170 per oz. before clawing back slightly into the close. Even a falling US dollar and generally poor US data didn’t support Friday’s metal prices. Recognising this trend allows us to identify opportunities and eliminate panic decisions. Monday saw safe-haven buyers back in the market after developments in the Middle East over the weekend and bargain hunters restore last week’s Gold losses. Though the recovery did pick up steam following last night’s US data miss, temporarily reaching key psychological $1,200 level, to currently settle just below at $1,195.
Fundamentals are slowly moving back in the favour of holding precious metals. Physical demand in Asia appears to be picking up again at the currently lower prices. While US data fails to deliver promised growth. Overnight, US trade deficit of $51.4 billion was much larger than the expected $41.2 billion and the worst reading since October 2008. This highlights the dollar’s strong headwind effect on US manufacturing, eroding the country’s global competitiveness. How long can the US dollar maintain present strength?
Looking ahead, most participants should remain cautious ahead of Friday’s blockbuster US non-farm payroll data, which is forecast at 231,000 in April, after an unusually weak reading of 126,000 in March. Following some soft US numbers and the central bank’s shift to a data-dependent stance of monetary policy, the data could provide clues on when the Federal Reserve will raise interest rates, and therefore the direction of precious metals dominate pricing factor, the US dollar.
Gold consolidates just below the $1,200 per ounce with no fresh news or direction for traders to latch on to. Renewed dollar strength follows unclear FOMC minutes, which could’ve been interpreted anyway to suit your own view on the FED’s ultimate intentions. This is capping any sustained Gold rally. Gold failed to hold key 1205 support, after briefly climbing to 1224 just before Easter, returning to its high volume comfort zone of around 1200. Traditionally, precious metals now enter the seasonally-low period where physical demand historically declines. However, the yellow metal is showing resilience, with higher lows and higher highs, with the next few trading sessions crucial for bulls that we maintain above the 1190 level. Last night did see this level break, only to claw back losses, closing at $1193, after weaker than expected US retail sales and slump in small business confidence.
Interestingly, the Commodity Futures Trading Commission (CFTC) reported that the Comex speculative traders increased their net-long positions in gold to 100,757 contracts, which marks a five week high, up from 80,019 a week earlier. A sustained build in price and an adjustment in current bearish sentiment, could rise the likelihood for further long accumulation and short-covering in the coming weeks. However this still poses risks, as this data proves the market remains highly speculative, and therefore vulnerable to price swings. Good news is we’ve already seen Crude oil prices recover 15% over the past month, leading a small commodity revival, as investors seek value in beaten up sectors. Will Gold and Silver follow suit?
It shouldn’t have come as any surprise that following last week’s meteoric rise in Gold, involving the longest winning streak in over a year, we would witness some sort of correction. The pullback in gold picked up steam after Federal Reserve chairwoman Janet Yellen said late on Friday that an increase in the benchmark federal funds rate “may well be warranted later this year” given a sustained improvement in US economic conditions. This was enough to see Gold prices retreat back to $1180 support, having stumbled around the $1200 psychological resistance. Many may argue that last week’s rally is in fact the correction to a market in a strong downward trend. That may be the case, but more weight should be placed on Gold’s recent resilience and how convincing $1150 support has become.
As stated many times before, USD is the main driving force for commodities, and in particular the increasingly public debate on when the Fed will raise interest rates. This has become highly speculative, with traders forecasting the Fed’s next move anytime data is released. Last night’s data was no exception, a weaker-than-expected ADP employment report followed by disappointing ISM Manufacturing data saw traders selling USD, with subsequent gains for commodities. This heightens volatility in an already uncertain market, making trading decisions increasingly difficult. Don’t expect any respite as we head into Easter, Employment and Non-Farm Payrolls are due tomorrow night, and in a holiday thinned market, expect volatility. (Non-Farm Payrolls are expected to show an increase of 245k with the Unemployment Rate holding at 5.5%. )
I particularly like Bullion priced in NZD. Last night’s disappointing Global Dairy Trade auction saw the index fall 10%, while New Zealand Whole Milk Powder falls 13.3%. All this should put NZD under pressure, which is long overdue for exporters into Australia who’ve been suffering a near parity exchange rate of late. Happy Easter everyone.
Last Friday’s better than expected US jobs data was the catalyst to finally push gold out of its narrow trading range. Gold prices broke lower, triggering sell stops below $1180 support, as the upbeat data increased the likelihood the Federal Reserve will raise interest rates in the near term. Given that US rate rises and a strong dollar have been on the agenda a long time, I’m surprised by the extent of gold’s reaction, especially as the downward spirals in many currencies could well create risks of their own.
Some market observers looked to China to push gold prices back towards the key psychological level of $1,200, demand has so far been unimpressive, raising concerns that prices have further to fall. I’m imagining that this recent sharp drop in Gold is more technically driven rather than outright negative fundamentals. Although I too wouldn’t rush into Gold here as the charts look damaged, with a possibility we still test $1130. Call me a contrarian, but now seems the ideal time to obtain some low cost exposure to the upside. June Gold Call Options are my preferred method. Limit risk (premium) with unlimited upside potential.
Not all is rosy out there, the US equities have tumbled in the last few days, while the market seems to have ignored news that the ECB has just rolled out a 60-billion euro-per month quantitative easing programme in a bid to prop up its ailing economy. Remember, a lot still depends on the Federal Reserve actually moving interest rates. A major fall in the share market may cause the Fed to hold off, while USD strength could keep inflation so low that the Fed waits even longer before they raise rates.