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The over-hyped Swiss gold referendum led to volatile trading for the
yellow metal last week. That continued into this week with safe haven buying
after the announcement of an early election in Greece and the resultant short
covering continued that volatility. However, it’s very plausible that the
coming week will show gold with even greater swings.
In less than two weeks the FOMC will meet to discuss the future of
monetary policy and are likely to announce that the timing of the first rate
hike will be data dependent, rather than based on a pre-determined schedule.
The most recent employment print of 326,000 and the improving trend in
economic data mean that if the Fed does announce that the first hike will be
data dependent, then the markets will begin to price in the rate increase for
much sooner, given the strength of recent data. Gold’s response to tapering
and its conclusion have shown that hawkish monetary policy is bearish for the
metal. This means that gold is in for a severe hit if markets begin to price
in an earlier hike.
The effects of the FOMC meeting will dominate trading. Those
confident that the Fed will announce data dependence will be looking to jump
in early by shorting the metal before the meeting. On the other hand, the
bulls will clinging to the hope of some kind of dovish sentiment, however
unlikely that is. We can expect to see the impacts of this carry on through
this week and continue until Yellen’s press conference.
Moving beyond the very short time period that precedes the FOMC
meeting, what is the long term direction of gold? Our view is that gold will
fall. The effect of the continual improvement in the US economy means that
the Fed has been able to take hawkish action by tapering, concluding QE, and
moving towards rate hikes that will drive gold below $1000. The latest
employment figures have not changed this, if anything, they have made it more
likely. Friday’s print builds on nine consecutive months of gains of more
than 200,000 in nonfarm payrolls and it has raised the average gain to
228,000 for each month over the last twelve.
The one of the key risks to this view is a shock event that causes massive
safe haven buying of gold. 2014 has so far included many periods of panic and
risk off situations that have triggered such safe haven buying. Most
recently, the fears around the situation in Greece, the Ebola outbreak, fears
around emerging markets early in the year, the situation in the Ukraine that
has been an ongoing concern for investors, and the list of events causing
safe haven buying in gold continues. Each of these, as well as many other,
similar events, have rocked the market throughout the year and caused safe
haven buying in gold. In the face of this, gold is still more than 35% down
from its 2011 highs.
Even quantitative easing from the European Central Bank failed
initiate a major rally in gold, despite being touted by the precious metal
perma-bulls as the catalyst for the next rally higher. The reason that none
of these factors were able to push gold significantly and sustainably higher
is the course of the Fed’s monetary policy. The juggernaut that is the
Federal Reserve has been moving towards tightening ever since the prospect of
tapering was first announced on 19th June 2013. The building of
this momentum, and the improving trend in the US economy that has allowed it,
has outweighed all other factors where gold is concerned. The most recent
short squeeze has not changed this fundamental situation.
Our views on exactly how far gold will fall are based on technical
and chart based elements. From these we believe that gold will reach at least
the level of $1030, which is major support for the metal. Beyond this we
believe that the movement will be less severe, which this presents less in
the way of both trading opportunities and potential profits. As a trading
operation this is less appealing so our focus after gold bottoms will be
elsewhere, all we will say is that those hoping for gold to reach new highs
are likely to be waiting a long, long time.
The latest employment numbers are bearish for gold and are likely to
add to the downwards pressure that the metal already faces. This will see the
metal trade down to new lows of at least the $1030 level and potentially
lower. In terms of risks to this, the key ones are shock events that cause
safe haven buying and accommodative monetary policy from the ECB. As 2014 has
shown these factors are not capable of changing the tide for gold, at most
they can slow its decline. This makes being short gold look very attractive
in terms of risk versus reward and it is these dynamics that have led us to
increasing our short exposure and fading this rally.
In fact, we are so confident in our views and our
trading strategies that we are offering a money back guarantee on all 12 month subscriptions if our closed trades
produce a negative return by December 1st 2015. To find out exactly what
positions we currently have open in our model portfolio and our future
trading recommendations the sign up below.
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