Friday morning update: Gold and silver have gone vertical in the last 30 minutes after Q4 GDP growth came in at just 1.9% versus earlier expectations of 2.2%. In addition, durable goods orders dropped more than expected. Interestingly, both gold and silver are rallying without a drop in the USD. Silver is leading gold, up 38 cents or 1.5% so far today.
The gold price rallied sharply during the start of 2017, advancing nearly $100 from $1,125 to $1,220 in less than a month. But the price failed on two separate attempts to break out above $1,220, forming a short-term double top. The last time such a pattern filled on the chart, it led to a sharp 4-month decline. The gold price appears to be headed lower with room to continue dropping before becoming technically oversold.
It would be bullish to see a bounce off the 50-day moving average at $1,179. Bulls certainly do not want to see the gold price fall below the December low of $1,125, which is just $65 below the current price. Such a move would be very bearish for the gold price and suggest an immediate test of $1,075 and potential test of $1,000.
The advance in the gold price over the past month has been driven largely by a weaker dollar. But a bounce in the USD index over the past few days has led to lower commodity prices. The USD index briefly dipped below the key technical level at 100 on January 25th, but quickly bounced back towards 101 the following day. This bounce has given hope to dollar bulls and created weakness in the gold price.
But two days of advances does not make a trend and the current trajectory for the dollar remains to the downside. Since the beginning of 2017, the index has been putting in lower lows and lower highs. So the bounce over the past few days is not yet significant and would require a move above 101.60 before dollar bulls should get excited.
The 100 level for the USD index is not just psychologically important, but is also technically significant. The 100 level was key resistance twice during 2015, then turned into support in late 2016. It remains to be seen if the 100 level turns into long-term support. The double-bottom pattern shown in the USD index is typically bullish, but anything can happen in the months ahead with a new party in power and unconventional leader.
Fundamental Factors are Pressuring the Gold Price
While most currencies are down versus the dollar today, the weakness has been driven primarily by the Mexican Peso sliding versus the dollar. This has occurred as a trade war is heating up between the Trump administration and the Mexican government. Mexican President Enrique Peña Nieto on Thursday canceled a meeting with US President Donald Trump that had been set for next week after renewed tensions erupted over Trump’s plan to build a wall on the border. Nieto refused to pay for the wall and Trump insists that he must, threatening import tariffs of 20%.
Much of the dollar’s future will depend on what the Trump administration announces in the weeks and months ahead, as well as any changes to the FED rate-hike trajectory. With the long dollar trade so crowded, I have predicted dollar weakness in 2017 and this has proven true thus far. But most analysts are still expecting a much stronger dollar in 2017.
The Trump effect on the markets may be wearing thin. Investor faith that President Trump will be able to generate economic growth has pushed equity values to record levels, with the Dow Jones finally taking out 20,000 yesterday. But a report from UBS says that investors are scaling back optimism that emerged shortly after the U.S. elections.
“We think this is warranted and see room for gold to extend upwards as markets digest uncertainty around U.S. fiscal policy. But gold has also recovered considerably and market uncertainty at this point could encourage investors to lock in whatever profits they can for now, especially as seasonal gold demand fades,” UBS said in a note.
Profit-taking after the huge run in early 2017 is surely part of gold’s latest decline. The sliding gold price may also be driven by the expiration of COMEX futures and options contracts. Gold options contracts for February expired today (1/26) and futures expire tomorrow (1/27). There is evidence that the big banks routine collude to manipulate commodity prices just prior to expiration dates. Long contracts will then expire worthless and short sellers profit. This could be another factor explaining gold’s price weakness over the past few days.
Lastly, weaker demand leading up to the Chinese Lunar New Year may help explain why gold was unable to continue higher this week. Gold is heading out of its seasonally strong period, which may put further pressure on prices over the next few months.
Of course, any number of black swan events or announcements by a President implementing significant changes could completely change gold’s direction. So, while we are generally bearish in the short-term, we plan to maintain core positions for the time being. Hedging long portfolios makes sense at this juncture, but we will be prepared to quickly close those positions should the gold price bottom above prior lows.
In the meantime, we believe there are investment opportunities in other sectors that are bouncing off multi-year lows and could have significant upside ahead. We have taken positions in some of the following sectors and continue to research our top turnaround picks for subscribers. These include select industrial metals, lithium, uranium, critical metals, agriculture, emerging technologies and high-growth Canadian cannabis growers.
The Gold Stock Bull portfolio returned nearly 70% in 2016 and is up 12% in just the first few weeks of 2017. You can get all of our stock picks, trade alerts and the monthly contrarian newsletter here.