- Gold closes in on a confirmed immediate-term breakout signal.
- This time around, silver is (thankfully) leading the way.
- Dollar weakness, not safety buying, is the prime motivating factor.
After spending the last few weeks in a lackluster sideways trend, the gold price is finally showing signs of life again after last week's brief scare. Encouragingly, gold showed strength on Tuesday even despite a lifting of the "fear factor." As we'll discuss here, the fact that gold is rallying without a sustained fear component is even better for its intermediate-term prospects.
Gold prices rose more than 1 percent on Tuesday as the U.S. dollar index weakened after North Korea expressed a willingness to "denuclearize" and investors worried about aggressive U.S. trade policy. Gold and silver prices were both decisively higher for the day, thanks in part to a weakening dollar. Spot gold gained 1.1 percent to close at $1,334 on Tuesday, while April gold futures settled up $15.30, or 1.2 percent, at $1,335.
The dollar index hit a two-week low as traders bet on riskier currencies on the news that North and South Korea would hold their first summit in more than 10 years. North Korea's premier Kim Jong-un also expressed a willingness to negotiate with the U.S. in abandoning his country's nuclear weapons. Kim also said he would suspend all nuclear and missile tests while such talks were underway, according to news reports.
As discussed in the previous report, the single best thing that could happen to boost gold's prospects right now would be a weakening of the dollar's value, which would benefit gold's currency component. The PowerShares DB US Dollar Index Bullish Fund (UUP), which is an excellent dollar index proxy, closed slightly under its 15-day moving average on Tuesday in reflection of the weakness. A resumption of UUP's declining trend which temporarily terminated in February would lift the gold price out of its 7-week trading range and allow the metal to resume its upward path in March.
Aside from the prospects of lower geopolitical risks involving North Korea, worries over that the proposed tariffs by the Trump administration could spark a trade war have eased since last week. U.S. Treasury Secretary Steven Mnuchin on Tuesday eased investors' nerves on this score by providing assurance that the Trump administration would try to keep any new steel and aluminum tariffs from hurting the economy. While these easing fears have diminished gold's safety appeal, the weakness in the greenback as investors turn from selling risk assets and raising cash to moving into riskier currencies will help bolster gold's intermediate-term (3-6 month) prospects as long as these fears remain in abeyance.
Underscoring the rising demand for currencies other than the dollar is the recent rally in the euro. The CurrencyShares Euro Trust (FXE) reflects the latest demand for euros in the wake of the diminished safety concerns in the U.S. A rising euro also bodes well for the gold price since it tends to trade inversely to the dollar index as well as serving as a barometer for the euro zone's increasing economic health.
The iShares Gold Trust (IAU), my favorite gold trading vehicle, rose 1.11% on Tuesday and closed above its 15-day moving average for the first time since last month. A higher close from here in IAU would effectively establish the case for another short-term rally attempt in the gold ETF, especially if accompanied by dollar weakness.
Providing some context for Tuesday's rise in the gold ETF was an even stronger rally in the iShares Silver Trust (SLV). SLV rose 1.87% the day and closed decisively above its 15-day MA to signal that silver may finally be ready for a worthwhile relief rally this month. Additional follow-through strength in SLV would be good news as previously discussed since relative strength in silver nearly always bodes well for the near-term gold price outlook.
We're getting very close to another confirmed entry point in the gold ET (IAU), which requires a 2-day higher close above the 15-day moving average. For now I recommend that conservative gold and gold ETF traders continue to wait for the aforementioned confirmation signal 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.
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