Wednesday, 27 June 2018

Gold bottoming at the December 2017 low

Unlike after previous FED rate hikes, precious metals don't quickly bounce up but continue their losing strike. A stronger USD is only part of the story.

Gold has been bottoming near the early December 2017 low last Thursday June 28. Despite an uptick on the last trading day of June the $1252.4 close isn't what gold investors had in mind when they saw the metal rally to gain $1300 by year end. The below graph runs till last Monday. A first plunge mid May brings the yellow metal below $1300 for the first time in 2018. The timid recovery is smothered after the FOMC meeting raising the FED interest rate with another quarter. The narrative is that four rate hikes are not to be excluded in 2018 and that the FED monetary policy no longer is accomodative. This brought about an abrupt rise in the USD index. That last rise proves not sustainable as the USD index is unable to hold on to the 95 level.

Gold price in USD in the first half year 2018 (click to enlarge)
Inverse of the USD index. A perfect correlation with gold implies that the graph profile should look identical.
  (click to enlarge)
The USD has been weakening till about February, trading sideways till mid April. The green back started strengthening throughout most of May with a second peak after the FED rate hike. Gold is behaving like a foreign currency, mimicking the inverse of the USD index, though imperfectly. Despite the USD index off its high, the yellow metal continued its unabated descent till last Thursday.

When plotting the gold price in USD against the dollar neutral gold price (graph provided by Kitco) it is obvious that the rally in January was entirely due to the USD slide. The dollar neutral gold price was not in an uptrend. It bottomed by mid March.

Gold priced in USD and Kitco's dollar neutral gold price.
The opposite holds from mid April to early June when the gold price slide was completely due to the USD strengthening. Kitco's dollar neutral gold price maintained its moderate uptrend. Since the FED rate hike however, gold is sliding rapidly, both in USD and in foreign currency: the gold slump aggravated.

July continuation

The first trading week in July always is atypical, because of national days both in Canada and in the US. It wasn't any different this year. On July 2nd, gold closed at $1241.5 on Comex equalizing the December 11 trough. Technically this is important as it invalidates the thesis that successive lows need to be higher in order to confirm the gold uptrend since the December 2015 bear market low.

Equally important from a tactical point of view was the bounce on July 3rd to $1252.4.  Apparently the July 2nd bottom was the usual short selling exhaustion by US speculators unwilling to hold on to their short position over July 4th. 

1 comment:

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