With the recent resurgence in the gold market, we will go through where the market is now, how the ETF are impacting and also talk about the central bank buying. As this website revolves around technical analysis we will also take a look at what the charts are showing and has the recent drop in price changed this outlook.
Gold investors know that the metal has been under pressure due to expectations of a Fed rate hike in 2016. Many believe that an increase in the Fed Funds Rate would strengthen the dollar and send prices for precious metals lower. This has been a key driver of the decline in the gold price to support at $1,250, the 200-day moving average. But this talk has been going on for almost the past 12 months and so far we have only had the one hike back in December 2015 and nothing since. So will we get another rate hike before the end of the year? Last month the federal fund's rate was pricing in an 11% chance of a fed hike this turn but this month the rate hike odds have massively increased to 70-80% chance before the end of the year but the recent speech by Janet Yellen painted a somewhat dovish speech at the beginning of the week. The rate hike was not take off the table but the language has not been supportive of higher rates.
Below you can see the breakdown of what expected rate hikes were going to take place over the past 3 years and what has happened.
2. Recent GDP projections have been decreased across the board in multiple countries but looking at just the US in 2010, the White House projected that GDP growth would "accelerate in 2011 to 3.8 percent" and "exceed 4 percent per year in 2012-2014." However, GDP has averaged about 2 percent since the recession ended, producing the worst economic recovery since World War II. The IMF current prediction from 2.8% at the beginning of the year it is now down to 1.5%.
3. Consumer confidence seems to be playing an important role in the Fed decisions so let’s take a look at the current confidence. Unfortunately looking at the latest Michigan Consumer Confidence it is around the lowest it has been in the past 2 years dropping back below 88 level.
4. Inflation is always the topic brought up when referring to gold as the general consensus reads that people buy gold as an inflation hedge and when there is no inflation then the precious metal is out of fashion. Looking at the inflation expectation in the US they are currently dropping to their lowest level since before the 80s. This does not look like a positive for gold but the USD index has risen recently and looking at inflation in other currencies you start to get a different picture. As the rate is only around 1% compared to the 2% target the Fed would need to lower, not raise rates to increase the inflation which bodes well for gold.
Take the UK currently after the Brexit vote, the currency has dropped 10-20% in value since then and due to this, inflation expectations are currently rising in the UK and the price of gold in GBP is coming close to testing the highs and this may be seen in other nations such as China where the normal steady range for CNY has been broken and the has been a slowly weakening over the past few days.
5. Debt is an ever-present fixture in this world and the more debt grows, the harder it will be to go back to the days of normal interest rates. One of the major issue with low-interest rates is the misallocation of capital and companies staying alive purely down to the extremely low financing costs they have. If the Fed looks to raise this rate it can cause a wave of bankruptcies and even issues paying back the national debt. When defaults happen this can cause a deflationary spike meaning that inflation will drop and rates would need to be lowered.
The annual deficit in the US is around 1 Trillion a year and currently stand just shy of 20 trillion. An increase of just a few percentage points would create a much larger problem paying just the interest on the debt. This is not a uniquely US problem, it seems almost every economically developed country is having the same issue and the IMF recently released their figure for a total global debt of 152 trillion which is over 225% of global GDP.
6. One of the main bell weather of the economy seems to be the stock market although as I am sure you are aware there can be a vast difference between the performance of Wall Street and Main Street. Looking at the stock market it looks to have run out of steam and the technical are not looking pretty. It has not been able to make new highs for over two months now and looks set for a fall. Looking at other metrics to value stock such as the P/E, P/B ratios and dividend yield.
Looking at the current gold chart, if we move away from the short term to the longer term charts you can see that back at the beginning of the year gold broke out from its downtrend and through its 100 days moving average. This moving average was tested on the first pull back and in the past couple of weeks has dropped back but not quite test the level. Looking at the movement, this looks like a great time to add to any positions or open long positions for the coming move upwards.
With all the current factors listed above I see a small chance of any rate hike which is currently putting the lid on the gold price. After the next confirmation of no hike, I would expect to see a strong upward movement of the price and if this is combined with uncertainty around the US elections and a weak stock market we would be looking at a move of well over 100 dollars per ounce.
Are there any factors that may stop the rate being hiked? Unfortunately, yes there does seem to be.
1. Although every tv personality on Bloomberg or CNBC is lauding the decrease in unemployment rates the true figure behind the scene has not pointed to the great recovery painted in the media. Looking from just 2014 onwards, when the types of jobs are broken down you get a better view. The proportion of jobs in bartenders and waiters have gained by 547k jobs but manufacturing has lost 32k jobs. So is the US employment market as strong as it says? well, that depends on how the service sector is performing, which as of recently seems to be weakening.