Gold Loses 'Ukraine Premium'

Includes: GLD
by: Acting Man

Gold Pulls Back Ahead of FOMC

As we always stress, it is generally not a good idea to buy gold on geopolitical news. Unless geopolitical developments lead to more government spending and more monetary inflation to fund it, they should not influence the gold price in the medium to long run. In fact, such rallies are per experience always given back. It is of course unknowable how big a premium has been built into the price on account of the Ukraine/Crimea crisis, but as of the time of writing, gold has lost about $35 from its recent high.

In a sense it is fortuitous though that this has happened in the run-up to the March FOMC meeting. A good rule of thumb is that whenever gold rises into the meeting, it is likely to decline thereafter and vice versa. Obviously this is not a hard and fast rule that always works, and it may not work this time. We are merely talking probabilities. The pullback should also help to realign the one sentiment data point that was a bit troubling lately, namely the DSI (daily sentiment index of futures traders).

Gold pulls back as Ukraine situation simmers down.

Obviously we don't know yet what will happen after the release of the FOMC statement, but we would say that the action in the week or so after the statement is more important and informative than a geopolitics-driven spike.

Incidentally, Casey Research recently published a chart showing the average monthly performance of gold since 1975, and to our surprise it was found that March is apparently the weakest month:


Gold: average monthly performance since 1975.

For additional information such as an overview of the average performance in different market conditions, see here. Interestingly, it does not matter whether bull or bear market conditions obtained: March is always the weakest single month on average, except for the five year period 1975 to 1980, when April was even worse. So far, March has obviously not lived up to its reputation, but the month is not over yet.

The recent pullback differs a bit from previous pullbacks since the December low, as it is the steepest yet (keep in mind that this is written ahead of the COMEX open and things might of course still change). We continue to believe though that the high of last August remains a reasonable short term target, provided no major support level is violated. Given the price action since the rally has begun, we would now regard $1310-$1320 as the level that should ideally hold on a pullback. As long as that's the case, we'd expect 1430 to be tackled relatively soon. If this level fails, a more substantial correction must be expected, but we'll cross that bridge when get there.

Charts by: BarCharts, Casey Research