After a 37% decline from 2012 highs of $1800 and 19% fall from 2014 highs of $1395 all eyes are back on gold, which found support at the $1130 level towards the end of 2014 and has regained $1200 in early 2015. The renewed interest in gold comes partially from its safe haven qualities seeing a revival amid worries about global growth and political instability offsetting the hindrance of USD strength from a likely Fed rate rise and global central bank policy divergence as well as recent market complacency as to another crisis. So, is that it for the downtrend? Is it time for a rebound? Or is more weakness on the cards?
The dollar-denominated commodity tends to suffer from a strong US Dollar, and this has been the case for a good while now. However, with the Fed having tapered out of QE and markets well briefed for a US rate rise in 2015, combined with the ECB set to pull the trigger on sovereign QE imminently to act against recessionary and deflationary risks in the region, the only direction for the US dollar seems to be "up". Thus, non-USD traders/investors will likely have to bite the bullet and pay a higher relative price for any necessary flight to safety, or indeed look elsewhere for shelter.
Fewer Financial Crises Keeps Gold Prices Down
Traditional demand as a hedge for inflation is limited, with one struggling to identify any meaningful inflation in the developed world that requires hedging (despite rock bottom interest rates). In terms of a safe port in a storm, helped by virtue of its relative scarcity, any talk of geopolitical risk is a boost (Ukraine; Middle East; Greece is the latest with potential for an anti-austerity/anti-Euro party to take power), however, with global central banks having shown their willingness to step in to avoid another crisis, market fears are not what they once were. Lastly, in a world of low interest rates, gold offers no income. Add to this big levels of liquidation from funds as the metal fell out of favor from financial crisis highs due to speculation-induced volatility and drivers are lacking, justifying the metal’s lower price.
However, with commodities having suffered a rout of late as the oil price plunged, and USD rose (Fed talk, less petro-dollars in market) we wonder whether the metal is oversold and set for a recovery as equity weakness resumes following traditional Christmas strength, and we see further confirmation of a slowing China (far-reaching knock-on effects) and Europe’s struggles increasingly taking the wind out of any global recovery sails. The series of rising lows for the gold price from early November bodes well with potential for a bullish ascending triangle pattern to result in a trend reversal from end-Jan, taking the metal back above the 200-day moving average and towards $1300, likely helped further by a renewed physical investment interest from funds keen on getting back in at the bottom.
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