Just when it looked like gold's support was gone, back comes the safety bid as the fear factor returned last week. Renewed concerns over domestic trade policy and its possible impact on the U.S. economy put gold back into the spotlight last Friday. In today's comments I'll make the case for an upside resolution to gold's lateral trend at some point in March. We'll also examine some factors which would boost the odds of a gold turnaround this month in our latest discussion of the near-term outlook.
Gold prices rose on Friday in response to the heightened threat of a global trade war. President Donald Trump's decision late last week to place tariffs on imports of aluminum and steel caused alarm on Wall Street, sparking interest in safe havens including gold and the Japanese yen. After hitting the $1,302 level on Thursday, its lowest level since Jan. 2, spot gold rose 0.5 percent at $1,322 while April gold futures settled $18.20, or 1.4 percent, higher to end last week at $1,323.
Let's examine the growing list of factors which could boost gold's performance in the coming weeks. With all the increased worries confronting financial market participants right now, gold has all the psychological support it needs to establish a bottom and shake off its recent lethargy. Foremost among the many worries right now is the impact higher interest rates might have on the stock market. Already we've seen the damage inflicted on equities a month ago when rate-related jitters caused panic selling on Wall Street. While there was some initial spillover weakness in the gold market related to this panic, the metal's price bounced back in the immediate aftermath of the stock market's plunge as the all-important "fear factor" carried the day.
Another potential worry facing investors is the latest series of statements relating to the U.S. economy by President Trump. A couple of weeks ago Trump voiced support for potentially increasing the federal tax on gasoline prices by 25 cents per gallon. Investors didn't take this statement too seriously since it's highly doubtful the Republican-led Congress would actually pass this measure.
The following week, however, Trump again made a statement which put the market on edge as he stated his intent to raise tariffs on steel and aluminum imports. Many analysts and economists believe that such a measure would be a legitimate reason to sell stocks, thus potentially upending the bull market in equities on at least a short-term basis. The very possibility that this might happen is enough to provide an additional layer of safe-haven support underneath the gold price. Moreover, it could also serve as a stimulus to a gold price rally if investors really believed that the president will follow through with his promise.
Gold's most immediate supporting factor is the recent selling pressure in the equity market itself. As discussed in my previous commentary, gold is usually among the first among major assets to bounce back following a stock market decline as investors are most apt to entertain safety-related trades in the wake of a market rout.
Shown here is the latest graph of the April gold futures contract, which shows how rapidly the gold price bounced back last Friday after breaking under its Feb. 7 pivotal low of $1,314 the previous day. Earlier last week, the gold price violated the $1,314 level which was not only the pivotal low that was established at the Feb. 7 bottom, but also my recommended stop loss for short-term trading positions. Consequently, this pushed us out of our trading position in my gold tracking fund, the iShares Gold Trust (IAU). Yet something interesting can be seen in the latest gold chart. To wit, this is one of those rare instances where gold's price is below the 15-day moving average and yet the 15-day MA is beginning to curl upward despite gold spending most of the last two weeks below this moving average. Keep in mind that if the gold price can close two days above the 15-day MA next week, the fact that the trend line is starting to reverse its recent decline will reinforce an immediate-term buy signal and make it more likely to stick this time around.
Source: www.Barchart.com
It would greatly help the cause of the gold bulls if the U.S. dollar index (DXY) shown below falls below its 15-day moving average in the coming week, which would imply renewed weakness in the greenback. The single most important factor, aside from uncertainty over trade policy and interest rates, would be an erosion of the dollar's value. A renewal of the downward trend in DXY which sees the 88.50 level decisively broken would clinch the case for a March turnaround for gold.
Source: www.BigCharts.com
It has been a while since I've mentioned silver, but this would be a good opportunity for bringing the white metal back into our discussion. The iShares Silver Trust (SLV), which I'm using here as a silver price proxy, never once validated gold's breakout attempt in mid-February since SLV failed to close two days higher above its 15-day moving average. This is an important concern which I admittedly overlooked last month. SLV remains under its 15-day MA as of Mar. 4, but a decisive breakout above the 15-day trend line in the coming week could easily pave the way for a reversal of gold's short-term fortunes. After all, leadership in silver is almost always good news for the yellow metal.
Source: www.BigCharts.com
On a strategic note, I recommend that conservative gold traders continue to wait for the gold price to confirm a technical breakout by closing two days above its 15-day moving average (per the rules of my trading discipline) before initiating any new trading positions. Longer-term investment positions in gold, however, can be maintained as the fundamentals underscoring gold's two-year recovery effort are still favorable.
