Fed week is exciting for some. Gold bulls and bugs alike hope the Fed will do something or say something that will trigger a huge move in precious metals. It doesn’t work like that. The Fed follows the market, which for the Fed Funds rate (FFR) is the 2-year yield. The 2-year yield has been screaming higher over the past 12 months and it implies at least another two rate hikes in the future. That’s not good for precious metals and could be partly why (among other reasons) Gold and gold stocks have lost their 200-day moving averages. Whatever the reason, the short-term technicals are negative and there is risk of increased selling before a potential rebound in July.

First, let’s take a look at Gold and gold against the equity market. As we can see from the chart, Gold in June has failed twice at its 200-day moving average. That is different from 2017 when each time Gold lost its 200-day moving average, it made a V rebound back above it.

Gold & Gold/Stocks

Gold’s weakness against the broad equity market is another concern. At the bottom of the chart we plot Gold against the NYSE, a broad stock market index. The ratio recently failed at its downtrending 200-day moving average and is also threatening a move to new lows for essentially the first time since 2015. (The December 2017 break was not sustained to the downside).

Elsewhere, the miners have spent the second quarter wrestling with their 200-day moving averages. GDX failed at its 200-dma twice in the past month, including last week. Meanwhile, GDXJ has shown a tiny bit more strength but essentially has wrestled with its 200-dma since April. The silver stocks (SIL) have been weaker as they have not traded above their 200-dma since January and could have started to breakdown on Friday by closing at 3-month low.

GDX, GDXJ, & SIL

The immediate outlook for precious metals is negative as the price action suggests but current bearish sentiment implies a rebound is on the horizon. The summer could be playing out as we anticipated three weeks ago. An immediate move lower could push Gold to strong support around $1260 and that would put sentiment indicators into truly extreme territory. From there, it is critical that the sector recaptures 200-day moving averages. Given our recent cautious views, we have narrowed our focus to a smaller group of companies capable of performing well in this environment. To follow our guidance and learn our favorite juniors for the next 6 to 12 months, consider learning about our premium service.

 

SPDR Gold Shares is an ETF that tracks the performance of gold in the financial markets. It is denominated by the ticker GLD and is one of the most widely watched gold indicators. The gold price is influenced by a unique set of factors. These include interest rates, the strength of the USD, supply and demand, etc. For casual traders, it’s important to know that gold is the go-to investment when equities markets sour.

When geopolitical uncertainty rocks the financial markets, investors typically flock to gold as a safe-haven asset. It tends to perform strongly when stock prices are volatile, and when the USD is weak. A strong dollar is a disincentive to gold investors, since gold is a dollar-denominated asset that appreciates when the precious metal is more affordable to foreign buyers.

GLD provides one access point to investments in gold (there are many options available), and it is priced at a fraction of the gold price. For example, GLD was trading around $127.62 per share (April 16, 2018), above both the 50-day moving average of $126.15, and the 200-day moving average of $123.13. This clearly illustrates that gold is bullish. Corroborating evidence is available from the anaemic performance of US stock markets.

  • The Dow Jones has a year to date return of -0.43%
  • The S&P 500 Index has a year to date return of 0.22%
  • The NASDAQ Composite Index has a year to date return of 3.72%

Poor Stock Market Performance Feeds Gold Price

The 2018 performance of stock markets is precisely the cannon fodder that commodities like gold need to appreciate. When traders and investors are pulling their money from the stock market, they are either investing it in fixed-interest-bearing securities or shifting resources to gold stocks and physical gold.

The current price of gold (April 16, 2018) is $1,349.10 per ounce on the Comex. Gold was priced at around $1,316.10 on 2 January 2018, and it has consistently appreciated ever since. In percentage terms, gold is up 2.5% for the year to date. This represents the opposite of what we are seeing in equities markets, and it holds true from a theoretical perspective.

Commodities trading options include a wide range of choices These include physical assets, futures contracts, options, exchange traded funds, CFDs, stocks, and even binary options. Gold ranks as one of the most commonly traded commodities and has been a store of value for millennia. Its price is determined by supply & demand considerations, and it is heavily influenced by monetary policy (interest rate hikes), political considerations, and the strength of the USD. A useful barometer of USD strength or weakness is the US dollar index, DXY. This indicator tracks the performance of the greenback against a trade-weighted basket of currencies including the SEK, CAD, GBP, EUR, CHF, and JPY.

Trump and Oil Boosted Gold Prices in 2017

US stock markets have floundered in 2018, and gold is in the black. If we extrapolate back to 2017, gold traded at around $1,151 per ounce in January 2017 and by the end of the year it closed at over $1,309 per ounce. That represents a 13.8% appreciation in the gold price. Equities markets also defied gravity in 2017, with double digit gains for major bourses. It appears that confidence in gold was boosted by uncertainty with oil prices and additional uncertainty related to Trump’s election as president. We have seen a tempering of these concerns as time progressed, and gold has stabilized while equities markets have retreated.

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