Gold: New Year Reversal Or Dead Cat Bounce?

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Includes: ABX, GFI, GG, GLD, HL, NEM
by: Lawrence Williams

Summary

The gold price has moved up around $30 in the first three working days of 2017.

Is gold's upwards move sustainable? Much may depend on how President Trump's policies are viewed once he assumes office in a fortnight's time.

Technical analysts are warning that gold's sterling performance at the start of the year could be just a dead cat bounce.

Are we seeing yet another major reversal in the gold price immediately following a major holiday period, or should gold investors be very wary regarding gold's sharp rise in the first trading week of 2017? We commented last month on the apparent relationship between significant US public holidays and changes in gold price sentiment last seen in 2016 with gold and silver prices climbing sharply from immediately after the Christmas/New Year holiday, right up to Independence Day, immediately after which gold and silver prices changed tack and trended sharply downwards (See: GLD Drops 158 Tonnes Since Independence Day) - perhaps led by a major unloading of holdings in the biggest gold ETF - SPDR Gold Shares (NYSEARCA:GLD). So far this year (admittedly only two working days) GLD holdings have remained unchanged but whether this represents a change in trend, or just a hiatus in a continuing offload is, as yet, uncertain.

As to the gold price itself, it ended 2016 at a spot price of US$1,151 and as I write is sitting a little more than $30 higher than that, a level last seen in November on its way down from a year's high of around $1,367 immediately after the Independence Day holiday in July. This time around, it actually peaked at around $1,179 overnight and moved down, and then back up, as New York opened and with the Chinese New Year holiday and the Trump inauguration only around three and two weeks away respectively one can expect a certain amount of further price volatility on the positive side. But, be warned, the technical analysts still see gold in an overall downtrend and caution against a 'dead cat bounce'.

We still feel that there are a fair number of positive factors affecting the gold price ahead, but it is probably too early to say whether the recent upwards move in price - in part aided by a sharp weakening in the US Dollar Index (DXY) which is still at 101.5, down from around 103.8. We have already commented that the US Fed, whose 25 basis points interest rate increase saw a perhaps what may be seen as an over the top rise of 3-4% in the dollar index, may be trying surreptitiously to bring the index down a little as the strong dollar will be making US exports less competitive and imports more so.

So, in our view the gold price may remain volatile, but to the strong side, until the end of the month. Once the Chinese New Year holiday starts - on January 28th - we may see weakness given the Chinese market will close for a full week and pre-New Year buying will be behind us. That gives a strong opportunity for those who would like to see the gold price lower step in the futures markets. Beyond that the short term price trend will probably be dependent on the initial impact of the Trump Presidency and the view as to whether he will really be able to implement many of his ideas flagged as his proposed policies during the Presidential campaign. We see some of his proposed domestic policies as likely to be hard to get under way and even where they seem to be coming about the effects may be far slower to take effect than the markets expect. Meanwhile some of his foreign policies - particularly his confrontational attitude towards China - are worrying while a proposed rapprochement with President Putin and Russia, which we see as a positive policy, may well run into serious opposition from Democrats and some Republicans alike.

Thus the gold price direction for the year probably remains in the balance until some of the early year factors currently influencing it are behind us. It's been pretty positive in the first couple of days of the year. Will we see another prolonged runup in the price up until Independence Day yet again? If we do we would anticipate markets being particularly nervous in July in case we get a repeat of the 2016 downturn - and again September for Labor Day - it was the Labor Day holiday in 2011 which immediately preceded the subsequent four year bear market in gold. By July at least we should probably have an indication whether the Fed will indeed push ahead with interest rate rises as we see the likely first such decision in 2017 to be taken at the June FOMC meeting which is due to take place June 13-14 and will be one of those followed immediately by a Press Conference and Economic Statement from the Fed chair. The initial impacts of the Trump Presidency on markets and the US economy should be becoming apparent by then. We just don't see the Fed moving on interest rates until they see how new policies and the economy might be progressing.

Meanwhile the best indicator for big money sentiment towards gold will be seen in gold movement in or out of GLD. If more big sales are seen in the next few weeks, expect the gold price to turn down again. If there are significant purchases into GLD then expect the gold price to test $1,200 or higher.

Do read my article on how I see the year unfolding - consider this article an update - and those stocks which would likely be the best beneficiaries should gold and silver continue to rise. (2017 Predictions - Gold, Silver, PGMs, The Dollar and Geopolitics.) There is probably more benefit to be had in silver rather than in gold given the gold:silver ratio (GSR) is currently at over 71. We would anticipate it moving below 70 - possibly as low as 65 if the gold price continues upwards. That would reinforce the prospects for our top precious metals stock - Hecla Mining (NYSE: HL). This is primarily a silver stock, but with some positive gold output and is mid-way through an expansion program which should further enhance its prospects. We also like Barrick Gold (NYSE: ABX) and Newmont (NYSE: NEM) as the world's two biggest gold miners with operations in generally considered safe political environments and thus the gold stocks institutions will mostly turn to when they feel they need to increase their gold exposure. We also like Goldcorp (NYSE: GG) and Gold Fields (NYSE: GFI) as recovery stocks which had been oversold by the markets on some poor quarterly results not taking into account that management has been predicting better things ahead.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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