With the price bottom nearly in place, gold bulls appear to be ready for action again, according to Bloomberg Intelligence.
Key factors in gold’s recovery will be the U.S. stock market and the greenback, Bloomberg Intelligence senior commodity strategist Mike McGlone said in the Bloomberg Commodity Index Outlook for September.
“The dip in the metals bull market appears near its nadir … Gold has declined 15% from its peak this year, yet remains in a rising trajectory in this rate-hike cycle despite the stronger trade-weighted broad dollar and record-setting stock market,” McGlone wrote. “A bit of sustained mean reversion in the stock market or dollar should unlock the cage for the well-rested gold bull.”
The Federal Reserve meeting on September 25-26 could be one of the positive triggers for gold prices, McGlone pointed out.
Currently, markets are pricing in a 99.8% chance of another rate hike in September, according to the CME FedWatch tool.
“Getting past the expected Federal Reserve rate hike in September should be positive for gold, in recovery mode from good support near $1,165 an ounce,” McGlone said. “Looking at what gold ETFs have done during this Federal Reserve tightening cycle, we believe prices are likely to rise soon.”
McGlone compared today’s gold price set-up to the period just preceding the almost 34% three-week rally in 1999, pointing to the net-short positioning within the gold ETF space.
“A similar pop now would put gold near $1,600 [an ounce] next month. Extremely low volatility is the connection, with gold's 90-day reading the lowest since September 1999. The 60-day level hasn't been this low since 1997. Such a condition is unsustainable, in our view. Mean reversion in volatility typically occurs with the opposite conditions. The greatest net-short position in the Comex (CME)-traded gold database (2006) is an added risk,” he said.
'#Gold needs to recapture the $1,197 level to generate interest' - #PeterHug on #goldhttp://t.co/gtL0xoDeTNpic.twitter.com/CpvXJIWdon
— Kitco NEWS (@KitcoNewsNOW) September 4, 2018
“A minor spark” will also be enough to get the gold rally going, added McGlone.
“In 1999, expectations of limits on central-bank sales were a prime short-covering spark for gold. That rally was fleeting, but current conditions indicate extreme risks for short positions,” he said.
Bloomberg Intelligence is also convinced that gold’s price bottom is near, but added that another boost to the U.S. dollar rally or to the U.S. stock market rally would be a potential headwind.
“Gold holding steady in an environment of dollar strength and a stock-market rally indicates a bullish divergence. Elevated mean-reversion risks for its primary adversaries are quite supportive for a sustained gold rally. The yellow metal bumped up near $1,400 an ounce in April with the Bloomberg Dollar Spot Index and the S&P 500 both down about 3%. Back at good support near $1,200 with recoveries in the stock market and greenback, gold is near the lower end of its trading range,” McGlone wrote.
On top of that, the negative effects of trade tensions on gold should subside, according to the commodity strategist.
“Pressured by trade concerns, the Bloomberg Industrial Metals index appears at a discount within the broader nascent bull market. It's unlikely to be derailed by more aggressive global trade rebalancing attempts from the current U.S. administration,” McGlone said.
|05-09-2018 07:14 AM|Gold prices continue to be pulled by outside factors such as a strong dollar and dynamic U.S. equities markets creating a favorable and continued risk-on market sentiment. Today traders and investors bid gold prices higher with a strong U.S. dollar of equal force negating any realized gains.
According to the KGX (Kitco Gold Index) as of 4:15 PM Eastern standard time, spot gold is currently trading down $0.10 on the day. On closer inspection, it was dollar strength that created $5.30 worth of headwinds moving gold pricing lower, and trading resulted in an increase of $5.20.
Even with the recent selling pressure in the U.S. dollar, it has lost a little over 2% in value over the last two trading weeks. The value of the dollar index still gained just about 6% since the lows in February when the dollar index was fixed at 88.20.
Now that the last trading day in August has concluded, gold pricing has declined for five consecutive months. During the same period of time, the dollar index has gained in value for the last four consecutive months. In fact, the month of March was the only month this year that resulted in the dollar index losing value.
During the same period, U.S. equities traded to all-time record highs, creating one of the strongest bull market runs, and therefore favorable risk on market sentiment.
The strong growth in US equities coupled with dollar strength have put tremendous pressure on gold pricing. Gold has lost over $150 per ounce in value since April of this year when gold traded to a high just over $1,365 per ounce.
With a high probability that the Federal Reserve will continue its monetary policy of quantitative normalization, it is likely that the dollar will remain strong and gain value throughout the remainder of the year. Add to that the tepid reaction gold pricing has had throughout this year due to geopolitical uncertainty. These factors could continue to weigh heavily on gold pricing throughout the remainder of this year.
|03-09-2018 10:12 AM|Things Are About to Heat Up for Gold