Precious Metals Watch – Too early to buy

by: Georgette Boele

  • Gold prices have broken under the 200-day moving average…
  • …signalling that this year’s uptrend is over
  • In the near-term investors will likely continue to liquidate positions…
  • … therefore it is too early to buy gold
  • Our forecasts are under revision
161006-Precious-metals-watch-too-early-to-buy.pdf (58 KB)

How different a week can be?

How different a weak can be. At the start of last week, gold prices made a high just above USD 1,341 per ounce. The outlook was range-trading but gold prices clearly struggled to move higher because of the overhang of the massive speculative positions. In just a matter of days, the outlook completely changed. Not only was our projected range in gold prices broken, also the uptrend came to an end when gold prices broke below the 200-day moving average. What happened? We had expected that investors would continue to invest in gold for the following reasons:
1. A snail-pace of rate hikes by the Fed this year and next year
2. Low real-yields in the US
3. The unattractive US growth/inflation mix will weigh on the US dollar
4. Central banks elsewhere to continue monetary policy easing
5. Brexit would result in more safe haven demand for gold

Less supportive monetary policy expectations…

If we add everything up, in fact the opposite combination played out. First of all, the actions of the Bank of Japan have been viewed by investors as a tapering. In addition, there have been reports that the ECB would taper soon as well. However, we don’t share these views. We think that the ECB and the BoJ will extend easing before long. Meanwhile, expectations for a November rate hike have risen – they remain low though – following more hawkish Fed rhetoric. Overall, we think that financial markets are too worked up about a possible ECB taper and Fed November rate hike. When these expectations ease again gold prices should receive some support.

…and a hollow out of the gold support case

Recently, financial markets refocused on the impact of Brexit on the UK economy. This and hard rhetoric by UK and eurozone officials have resulted in a substantial fall in sterling. However, all of this barely affected global investor sentiment on financial markets. Therefore, gold prices have not benefitted. We don’t expect a sharp deterioration in investor sentiment because of the Brexit developments. We even expect the topic to move more to the background again as market driver in the coming weeks and months. As a result, gold prices will unlikely profit.

The rise in US yields and the uptick in US real yields have clearly been negative developments for gold prices. We expect that this move has run its course so that it should no longer be a headwind.

The technical picture has clearly turned negative with the break below the 200-day moving average in gold prices. This would mean that this year’s uptrend is over. We need to be careful though. First of all, what really matters is a daily and a weekly close below this level. Second, if the US employment report tomorrow comes in weaker-than-expected, gold prices could be close to USD 1,300 again.

Near-term outlook

The speculative community is substantially net-long gold. With the dramatic change in the technical outlook, investors will likely continue to liquidate positions and use any uptick in gold prices as an opportunity to sell. Therefore, we think that it is unlikely that buyers will step in in the near-term. The momentum is simply too strong. As soon as, a considerable amount of positions are cleared, buyers may step in again. For now the next support level in gold prices is USD 1,200 per ounce. Needleless to say our forecasts are currently under review.