Gold Is At Turning Point

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Includes: ASA, DGL, DGLD, DGP, DGZ, DUST, DZZ, GDJJ, GDX, GDXJ, GDXS, GDXX, GEUR, GGN, GHE, GHS, GLD, GLDI, GLDW, GLL, GOEX, GTU, GYEN, IAU, JDST, JNUG, MELT, NUGT, OUNZ, PHYS, PSAU, QGLDX, RING, SGDJ, SGDM, SGOL, TGLDX, UBG, UGL, UGLD
by: Tahir Zaman
Summary

The Fed's monetary policy, geopolitics and the French presidential election are the main driving factors of gold.

The first-round results of the French presidential election can become turning point for gold.

The Elliot Wave theory suggests a short opportunity in gold with better risk and reward.

These days, gold prices are mainly driven by the Fed's monetary policy, geopolitical tension, and the French election. I believe that in the near future the precious metal's prices will find a direction because of these factors. In this article, I will analyze the above-mentioned drivers and their possible impact on gold prices in the short term.

The Fed's monetary policy normalization is a bearish factor for the yellow metal; nevertheless, gold prices have surged almost 12% YTD -- mainly due to the "reflation trade" and investors' risk aversion. According to the Fed's recent communication, two more rate hikes are still in the cards for 2017. According to the Fedwatch tool of CME, there is a 55% probability of a 25bp rate hike in June and a 30% probability of another 25bp hike in December 2017. I expect this probability will increase and we will get at least two more rate hikes this year.

Furthermore, the Fed's willingness to start shrinking its $4.5 trillion balance sheet as early as this year is indeed a bearish factor for gold in the near term. However, the recent employment and inflation (CPI) data in the U.S. was not robust as the economy added only 98K jobs in March. CPI inflation declined 0.3% in the month of March to 2.4% y/y, but the Fed's preferred inflation indicator is the real Personal Consumption Expenditure, or PCE, which rose 0.2% in February to 1.8% y/y. We will get the next release on May 1, which can reduce the rate hike probability if there is a big downward surprise.

Geopolitical tension has been supporting the price of gold since the beginning of 2017 and has become more important as tension between the U.S. and North Korea has escalated recently. The presence of the U.S. naval fleet in the Korean Peninsula and North Korea's recent failed attempt of a missile test over will encourage capital flight to safety, and with gold being a traditional safe haven, it will benefit from such situation. Moreover, tension between the U.S. and Russia over Syria and the use of the "mother of all bombs" in Afghanistan by the U.S. has already increased investors' concerns about geopolitics and the demand for gold. The first round of the French presidential election will be held on April 23, which is another source of uncertainty because of National Front candidate Maine Le Pen's lead (23.5%) in polls -- gold always benefits from uncertainty.

Now, on the basis of the above analysis, I will develop a hypothesis about the direction of gold in the short term. It's obvious that the underlying bias of gold's recent upward trend is the geopolitical tension ignited by the tension between the U.S. and Russia and the U.S. and North Korea, as well as the upcoming French presidential election. Investors anticipate higher demand for gold because they think there is a growing probability that the U.S. will engage in some sort of conflict either with North Korea or Russia, and that far-right presidential candidate Marine Le Pen could become the next French president.

Indeed, recent developments in North Korea and growing uncertainty ahead of the first round of the French presidential election will increase demand for gold this week, and its prices could go higher toward the 1310-1320 level. However, I expect the U.S. will not engage in any conflict and that Marine Le Pen will not perform well in the first round of the election as suggested by the polls. This will change investor sentiment about gold in the last week of April, and we should see a sharp decline in gold prices after that.

From the Elliott Wave perspective, which is my preferred technical indicator, gold prices are in wave B of leg Z of a complex correction. According to this theory, gold prices should not go beyond the 1337 level, which is the starting point of wave A. Prices should decline in impulsive 5 waves to form wave C to complete this zigzag pattern.

On the basis of the above analysis, I would conclude that we will soon see a trend reversal in gold as there are flaws in the underlying bias of the recent trend. The results of the first round of the French election might trigger that reversal if Marine Le Pen does not get enough votes, as predicted by the polls. Furthermore, Elliott Wave analysis is also identifying a good short opportunity in gold where wave B will not go beyond the 1337 level. Traders should monitor geopolitical events carefully in the coming days, and those who want to open a short position in gold should apply risk-management techniques properly to avoid big losses in case something dramatic happens in geopolitics.

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.