Sharps Pixley: The gold bulls still have the advantage - at least for now

My latest article on the Sharps Pixley website - - with some minor edits and updates.

Observers shouldn’t be too surprised that gold has fallen back around $10-$15 on Friday after Thursday’s fireworks which saw it rise over $50 an ounce at one time.  Nor should they be too surprised either that European and US equities staged something of a comeback, despite Asian markets continuing to tank  Some would say that gold rose too far too fast – leading to some inevitable profit taking as it now seeks to stabilise in the $1,230-$1,240 range before perhaps making another tilt at higher levels.

Friday’s fall followed on from a slightly more hawkish statement from Fed Chair Janet Yellen implying that the Fed was unlikely to reverse course on its plans to continue increasing interest rates.  Although interpretations of what she actually said vary, most boil down to perhaps one, or maybe at the most two, further rate rises in store this year.  We would suggest the former – if only as a way for the Fed to save face unless the US and global economies do make a significant recovery.  Yellen did seem to rule out a reversal of the December interest rate rise – but in doing so did also seem to suggest at least that this may have been under discussion – as was also a possible move towards negative interest rates!

But this probably had little effect on the gold price per se.  To an extent gold fell back on the aforesaid profit taking, together with a slight rise in the dollar index, up around half a percent.  There were also some slightly better than anticipated US data with filings for first time unemployment benefits falling more than expected.

But, all eyes may well be on the Shanghai and Shenzhen equities markets when they reopen next week after the Chinese New Year holiday.  Asian markets have fallen quite heavily overall over the past week and with the propensity for the Chinese mainland markets to show some quite large intra-day falls or rises, if there’s a major fall on Monday this could spread across other Asian market and to the Western ones too.  There’s so much fear in the marketplace with global recession talk rife that it might not take much to stimulate another big drop in equities prices across the board. Global equities are already technically in a bear market as pointed out by Julian Phillips in his latest market commentary - See: Gold cat out of the bag

It is this equities market weakness which seems to have stimulated a return of interest in gold as a safe haven which has been one of the key drivers of the rising gold price, which is up 15% year to date, despite the latest pullback.  All the more remarkable in that at the end of December 2015 virtually all the bank analysts were falling all over each other to predict a strong downward path for gold – heading to well below the $1,000 mark in many cases.  This could yet come about - but the longer and stronger the current surge continues the less likely this becomes.

The GLD ETF has been an excellent example of the way a fickle investment sector has been climbing back into gold.  Year to date the ETF has taken in investment equivalent to 73.64 tonnes of gold – more than the total liquidations out of the Fund in the whole of 2015.  However it should also be remembered that there were big inflows into GLD early last year too and even the current 716.01 tonnes total is comfortably below last year’s February peak of 773.31 tonnes.

And, as we have pointed out here before the gold price had a pretty good run at the beginning of last year, before falling back fairly sharply over the final six or seven months.  This time around there is perhaps more justification for it to stay up in terms of some key fundamental figures, and some worrying geopolitical factors, with the U.S./NATO seemingly set on confrontation with Russia over both the Ukraine and Syria.  But it is early days yet.  The bears may yet have their revenge, although we do think the bulls have the advantage at the moment.  It’s just a question of whether the momentum can be maintained.  We could be in for a very interesting week ahead when China is back online.

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