I’ve been under the weather for the last two weeks as of this writing, contracting things from strep throat, to a common cold, to a finger infection, to pink eye, and now something with my tonsils. It’s been the less fun part of the school year to date, especially seeing how none of my friends have come up with any of the symptoms I’ve dealt with. The grass is always greener on the other side, as they say. The same can’t be said for gold, however.
The big story on the Street from Tuesday came from the battering of Gold, as the price of this commodity fell by about $40 amidst a storm of news that didn’t bode well for the metal. This drop, the biggest in three years, was fueled in large part by hawkish comments from two Federal Reserve regional bank presidents; Loretta Mester of the Cleveland branch, and Jeffery Lacker of the Richmond branch. These comments fall in line with what we’ve seen other higher-ranking Fed officials say in recent weeks, that the economy is more-or-less primed for an interest rate hike. Reports also surface during the day Tuesday that the European Central Bank will aim to back off from its aggressive quantitative easing program, as the world of QE-eligible bonds becomes ever more scarce. This scarcity is in part due to investors unwilling to let go of bonds they already have, and central banks already owning a significant chunk of the sovereign bond market.
The Bank of Japan announced a ‘refocus’ of its QE program at its last meeting, which seemed to adjust their primary goal to maintaining the yield curve, in a sign of surrender that the effectiveness of quantitative easing is on the decline.
The combination of hawkish Fed presidents and signals that central banks may be less willing and/or less able to effectively utilize QE sent the dollar on a tear, with the Dollar Index Spot (DXY) jumping from 95.695 on October 3rd at the close to 96.169 on October 4th at the close. DXY is currently down slightly as I type this around noontime Wednesday, but the effects on gold remain.
As a mere college student, trying to learn as much as I can as things unfold, looking back on gold’s drop reveals that there were signals and reasons to be short gold. In addition to the stream of hawkish comments from Fed members in the last several weeks, technical analysis presented a big signal that gold was due to drop.
We saw a flag back in Q1 and Q2 as gold steadily marched upward, and this flag broke off in late May on a downward breakout point. Gold rapidly gained value yet again in late June after Britain’s Leave vote in the referendum concerning membership in the European Union, as investors sought haven assets amidst the shock to the system (you’ll recall JPY also dropped below 100 yen to the dollar immediately after the referendum’s results were announced). From there, gold entered a Descending Triangle, which came to an abrupt end when the metal dropped $40 in its breakout point on Tuesday. Should gold follow the ‘typical’ path in the wake of a Descending Triangle, suppressed prices should continue over the next few weeks.
From there, I see two possible routes for Gold:
2) The Federal Reserve does not hike interest rates in its November meeting, citing uncertainty over the election, but strongly suggesting a December rate hike if data continues to support it (of course…). Gold jumps on a combination of election uncertainty and a weaker dollar, but is subject to a correction downward after the election, particularly if Clinton wins, as the markets appear to be heavily pricing in right now.
To summarize, Gold’s pullback was to be expected from a number of viewpoints, including via technical analysis and the continuation of hawkish Federal Reserve members. Other factors could have been used to identify a pullback, but as a college student without regular access to a Bloomberg, those two will have to suffice. Suppressed gold prices compared to the last 4 months are anticipated to persist into November, when a fork in the road comes up as a consequence of the next Federal Reserve meeting.
I’m hoping each night I go to sleep that I’ll wake up and not be sick and/or not feel sick, because the grass is certainly greener when the body feels healthy. And while the grass may get greener for me when I get my full health back, gold’s shine looks to stay a little dulled for the short and medium terms.
Andrew
 |
| TradingView |
The Bank of Japan announced a ‘refocus’ of its QE program at its last meeting, which seemed to adjust their primary goal to maintaining the yield curve, in a sign of surrender that the effectiveness of quantitative easing is on the decline.
The combination of hawkish Fed presidents and signals that central banks may be less willing and/or less able to effectively utilize QE sent the dollar on a tear, with the Dollar Index Spot (DXY) jumping from 95.695 on October 3rd at the close to 96.169 on October 4th at the close. DXY is currently down slightly as I type this around noontime Wednesday, but the effects on gold remain.
As a mere college student, trying to learn as much as I can as things unfold, looking back on gold’s drop reveals that there were signals and reasons to be short gold. In addition to the stream of hawkish comments from Fed members in the last several weeks, technical analysis presented a big signal that gold was due to drop.
 |
| TradingView |
From there, I see two possible routes for Gold:
1) The Federal Reserve opts to hike benchmark interest rates in its November 1-2 meeting, favoring a relatively strong economy against uncertainty surrounding the presidential election. Gold suffers another drop as USD strengthens. Equities may also take a hit, save for financials, as I don’t believe the markets have fully priced in the potential for a November rate hike.
2) The Federal Reserve does not hike interest rates in its November meeting, citing uncertainty over the election, but strongly suggesting a December rate hike if data continues to support it (of course…). Gold jumps on a combination of election uncertainty and a weaker dollar, but is subject to a correction downward after the election, particularly if Clinton wins, as the markets appear to be heavily pricing in right now.
To summarize, Gold’s pullback was to be expected from a number of viewpoints, including via technical analysis and the continuation of hawkish Federal Reserve members. Other factors could have been used to identify a pullback, but as a college student without regular access to a Bloomberg, those two will have to suffice. Suppressed gold prices compared to the last 4 months are anticipated to persist into November, when a fork in the road comes up as a consequence of the next Federal Reserve meeting.
I’m hoping each night I go to sleep that I’ll wake up and not be sick and/or not feel sick, because the grass is certainly greener when the body feels healthy. And while the grass may get greener for me when I get my full health back, gold’s shine looks to stay a little dulled for the short and medium terms.
Andrew
No comments:
Post a Comment