-- Published: Thursday, 2 June 2016 | Print | Disqus
Many who got bullish gold in May got caught when prices collapsed by nearly $100 an ounce.
The press in early May was touting gold as one of the better performers of 2016, running stories about guru investors like George Soros who were reportedly selling stock holdings to load up on gold. The timing of this story’s publishing came in at just about the time gold peaked out.
The main culprit stopping gold’s rally was the switch in the timing of a potential increase in US interest rates, along with continued weak economic data from China, Japan, and Europe.
The Fed Minutes released in May showed a very vocal group of Fed governors in favor of raising interest rates sooner rather than later. If it weren’t for the upcoming vote in the U.K. on June 23rd, the “Brexit” referendum as it’s called; the odds would likely be higher than they are for a June rate hike. The odds today are running at only 23% for a June hike, which means a June hike is highly unlikely. However, the odds for a July hike are now at 58% while a September hike has the odds at 65%, As it is, unless the Fed is very certain that the Brexit vote result will be one where U.K. voters chose to stay in the Eurozone, the Fed will likely wait to hike rates sometime soon its result as no one knows the financial impact of the U.K. leaving the Eurozone. A vote to leave could lead to a breakup of the U.K. as we know it today. A vote which results in the U.K. leaving the Eurozone would likely lead to the Fed not raising rates in July, the Dollar and Japanese Yen moving higher and eventually gold moving up sharply.
This coming Friday’s US Employment Data is going to be closely scrutinized. Assuming the data comes in strong; this will go a long way in cementing ideas that the Fed is going to move to raise interest rates very soon. The wildcard would be a report that shows weak data, as that would lead to a push back on when the Fed moves.
Crude oil prices have stabilized. Instead of talking about sub $30 barrel oil, the market is discussing whether prices can get over $50 a barrel. At the very least, oil is no longer dragging inflation numbers lower. My own guess is that prices are going to be range bound for a while. At this time something close to a $40-$50 range seems what’s taking place.
OPEC was unable to cap oil production at today’s OPEC meeting as Iran refuses to discuss capping its production until production there gets much higher. Regardless of whatever the Saudi’s say to shore up unity in OPEC, the Saudi’s won’t agree to cut back production on their own unless they’re literally at a point where they can’t produce more.
Sooner rather than later Canadian oil production is going to get back to normal which will add oil volume. On the other hand, Venezuela‘s government has lost control of its finances, which will likely lead to cuts in production there. Nigeria will likely see less, not more production due to its fight with militants as long as the government there doesn’t’ pay the militants to not attack the pipelines. Libyan production is still offline. Last, if prices were to rally into the lower to mid-50’s a barrel, the world’s swing producer, the United States, would see producers quickly turn up their production. Therefore, I don’t see oil prices spiking much higher from the $50 level and staying there for long, which means inflation will likely remain subdued as far as energy plays a role in it.
The European Central Bank met today and as expected, it sat pat. The bank did mention concerns about a the U.K. Brexit vote and what a vote to leave might mean.
Therefore, gold is caught for the time being with bearish forces, not bullish ones which explains gold’s current price break.
What could change this?
An affirmative vote result by U.K. citizens to leave the Eurozone is probably the most bullish item immediately facing gold in the short term. Given that no one knows what an exit would mean, gold would likely be bought as protection against the unknown.
As for a vote that results in the U.K. staying in the Eurozone, I don’t think it would be all that bearish given the $100 an ounce break that has just occurred. Yes, gold would likely sell off on the result but what would be even bearish for it would be a June or July lift off in U.S. interest rates.
I’ve labled with an orange vertical line June 2nd on the above chart from Moore Research Center, Inc, a service that complies data on price move. The three lines represent:
· In magenta the longer time frame 30-years or longer
· In black the last 15-years
· In orange the last five years
Prices are complied and smooted out by Moore so that we can see the price tendencies almost on a day-by-day basis. What I look for is what the slope of prices are doing and if it matters whether the overal trend is bullish or bearish.
What their chart shows is that until July, prices have a tendency to drop more than rally. Once we get into July, this changes and the tendency is for prices to try to rally into late summer.
Daily Chart with Price Counts…created on April 13 2016
As you can see on the PriceCount Chart above, the market is now past the second orange arrrow, the second PriceCount and if a further break occurs, prices might challenge the 3rd PriceCount down towards 1187.2.
Weekly Gold Chart
Prices are staying under the 18-Week Moving Average of Closes, which according to my teachings means the Weekly Chart has a downside bias.
Today’s market action has neutralized the uptrend on the Daily Chart. I now think the market is in a consolidation phase as it trades on either side of the 18-Day Moving Average of Closes, the red line with a value of 1235.7 on this chart.
I’ve labeled the current trading range as I see it. It has a low of 1207.7 and a high of 1287.8 in this contract. If I’m right, it won’t have a lot of downside and most likely won’t get under the most recent low of 1207.7.
Those of you who are subscribers to my Market Research know that you went short on Tuesday Evening and took half profit on Wednesday morning as prices declined down towards the 1200 level.
As mentioned above, if the US Employment Data comes in strong, the Fed will be looking upon that as reason to raise interest rates, which initially should put more selling pressure on gold.
The biggest issue for gold traders is how to play the Brexit vote. As explained above, the outcome could send gold flying higher or dropping hard. Given the vote is weeks away, focus more on what the Employment Data Report says for more of an immediate price move.
I will keep my subscribers advised on what to do with their current short position via my Twice Daily Update.
© 2016 Ira Epstein Division of Linn & Associates, LLC.
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-- Published: Thursday, 2 June 2016 | E-Mail | Print | Source: GoldSeek.com