- Gold has posted another good week of price gains
- The upside keeps coming despite the prospect of Fed Funds rate rises
- The withdrawal of monetary stimulus has a diminishing effect
- The start of the week may see selling, but prices will soon bounce back
Gold prices posted a four-month high on Friday to record a fifth week of gains in a row. The precious metal found support as the Dollar extended its earlier decline despite a slightly higher-than-expected climb in core U.S. inflation.
Jeff Wright, Chief Investment Officer at Wolfpack Capital said:
“…momentum and positioning for next week may have given gold an extra boost…”
Source: www.investing.com, Spotlight Ideas
The Gold Futures for February 2018 (GCG8) closed +1.19% or $12.40, 0.9%, to settle at the price of $1,334.90/ Troy Oz. Gold recorded a weekly gain of roughly 1% so marking a fifth week of consecutive gains, so far in January the metal has climbed 2.2%.
The ongoing weakness of the Dollar has been chiefly responsible for extending the bull run in gold. Many have expressed their confusion over the softness of the U.S. unit given that the Fed are ahead of the pack when it comes to raising rates. However, as I have alluded to before, the Fed’s intensions are so well signalled that the impact of successive increases of 25 basis points appears to be a journey on the road of diminishing return to scale.
The U.S. Dollar Index (DXY) fell 0.8% as the Dollar traded at its lowest against the Euro in about three-years. Of course, do not overlook the fact that ECB minutes revealed that the Eurozone’s monetary policy makers expressed their approval as to how the regional economy was developing and the path that inflation was taking. So much so, that they may bring forward the date when they make an adjustment to their accommodative monetary policy.
As is well known, a softer Dollar can boost the appeal of gold as an investment, as most commodities are priced in Dollars.
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Watch American Inflation
Last Friday we saw that the core rate of consumer inflation, with gas and food stripped out, rose a sharper 0.3% in December, a notch above the consensus forecast and the highest reading in almost 12-Months. Beneign inflation has been a key factor in keeping the Fed’s move away from accommodative interest-rates slow and steady. Certainly, the inflation outlook will continue to frame the discussion over how aggressive the Fed will be this year with rate increases.
Inflation has a double-edged influence on gold prices. Traditionally, the metal has been a hedge against inflation’s erosive effects on other assets and there are some that firmly believe the metal will regain this function as inflation picks up this year.
However, the impact from inflation in pushing up U.S. Treasury yield and that makes non-yielding bullion less attractive in a rising-rate environment.
The two-year U.S. Treasury (T2) yield rose above 2% for the first time since September 2008 after failing to rise above 1% through much of 2016. The U.S. Treasury market was on the back foot as data revealed that the underlying pace of U.S. inflation accelerated last month finally drove it above 2.0%. The market-implied probability of a Fed rate increase in March exceeded 80%.
Resistance or Breakout
The advance in the gold price comes alongside continued strength in U.S. equity markets and crude prices and although further gains are likely, the immediate advance in gold looks vulnerable heading into next week. The earlier chart indicates some market congestion at U.S. Dollar 1350/Troy Oz.
It’s another quiet week for data with U.S. equity and bond markets close on Monday in observance of Martin Luther King Jr. Day. Then data points of note are the Fed’s Beige Book, the University of Michigan confidence surveys and the Philly Fed highlighting the economic calendar.
The focus for gold is on the technical picture with the +7% advance off the December low now approaching technical resistance.
Interestingly there is a similar setup in the oil market and if the current interpretation is correct, one may well see a short-term exhaustion trade early in the week.
The medium-term outlook remains higher, however, in the short-term the immediate advance remains vulnerable while pinned below the structural resistance near 1350.
If this breaks lower, look for larger set-back to offer more opportune long entries, with a breach of the resistance objectives at the 2017 & 2016 day-high closing levels of 1346 and 1355 suggesting a new advance to 1416.