Gold: The Good, The Bad And The U.S. Dollar
Dan Norcini | May 25, 2016 12:10AM ET
It wasn’t much, a bit less than 4 tons to be exact, but yesterday marked the first day in nearly a month that the SPDR Gold Shares ETF (NYSE:GLD) reported a drawdown in gold holdings.
The last such occurrence took place all the way back on April 25.
Considering the amount of gold that has been added since that time (66 tons), a 4 ton reduction is minor. What we will not want to see however is a PATTERN of falling reported gold holdings. That has been the one bright spot for gold that has held steady even in the face of weakness on the gold chart at the Comex. If this changes, then we have an issue.
Also, mining shares were whacked so hard yesterday that the HUI/Gold ratio took a pretty big hit. We will want to see how this plays out as well.
Let’s recap where we stand so far:
- The gold chart for Comex gold is bearish based on the indicators and the fact that it is trading well below its 50 day moving average
- The HUI to Gold ratio has fallen for the last two days in a row.
- The HUI is sitting right on top of its 50 day moving average with its technical indicators in sell mode
- GLD has just reported its first drop in gold holdings in a month.
These are objective facts that need to be considered by anyone trading the metal. Obviously, both gold and the mining shares have had a stellar run since January. That has come to an end for the time being. Whether this is just a correction in a larger trending move higher is unclear.
Look at the weekly chart and you will see why I am saying this:
Even after its sharp fall the past three weeks, it still remains above $1200 and above the former downtrending price channel that contained it for nearly three years. That is a positive.
The flip side is that the weekly ADX—which had been steadily rising since earlier this year—has now turned lower, indicating that this is now a pause in the uptrend. The DMI lines still show the bulls in charge with +DMI remaining above -DMI. The two lines are moving towards each other which can now be expected since the ADX has turned lower.
We will get a better sense of the intermediate term prospects based on what those two DMI lines do should they come close to each other. If the +DMI reverses higher and the -DMI reverses and moves lower, then the uptrend stands a good chance of renewing. If not, well, that's another story.
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I would say much depends on what the Forex markets do with the US dollar. If the market becomes convinced that the Fed is indeed going to hike, that will support the dollar and it should pressure gold. However, it is not just whether or not the Fed hikes; it's the tone they adopt and whether or not the market believes that the Fed has indeed made the transition into an interest rate raising posture moving forward.
Keep in mind that the Fed hiked rates for the first time in almost 7 years back in December. But look at what happened to the gold price. The reason?
Market players were convinced that it was a “ONE AND DONE” move for a while. In other words, the interest rate hike was over and done with and that was that. No one expected a sudden barrage of interest rate hikes in succession because the Fed said it was going to be data dependent. While they did state that they would like to get four hikes done in 2016, hardly anyone believed that was going to happen because the economic data was not strong enough. Even the Fed said as much.
Additionally, there were crosscurrents from overseas in the form of Emerging Market concerns, China woes, ECB woes and Japan woes, just to mention a few. Given that environment, many believed that the Fed could not run the risk of sounding too hawkish because of where the US dollar was trading. A strong dollar, at one up above the 100 level basis on the the USDX. was causing problems.
So the big question the market is going to be asking is can the Fed indeed hike rates at a pace that would send the dollar higher, with all the negative side effects from that, or will any potential rate hike not happen for a while yet again? If the answer to that question becomes one in which the market believes a slow but steady tightening cycle has arrived, then it is difficult for me to see gold moving higher, mainly because of the impact of a stronger dollar and higher rates. If the answer to that question is the latter, then gold should recover as it did in December of last year when the dollar actually began to weaken after that December rate hike.
The main thing to remember through all of this is something I have been saying over and over again” DO NOT GET MARRIED TO ANY VIEW OR POSITION”. Stay objective and keep your emotions out of things.
Gold is an investment. it is an asset class that sometimes is in favor and sometimes is not. Trading/investing is about making wise decisions to attempt to increase your wealth. It is not about joining some sort of movement. Leave that for those who are more interested in “being right about things” (in their own minds) rather than being successful. Do not forget this.
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