In a recent article, I suggested that gold would grind higher after reaching a bottom last month. That is precisely what’s happening. We’ve seen higher highs and higher lows, but every new high requires a subsequent consolidation. You’ll be up 10 or 12%, then off 8 or 9%. The ‘backing and filling’ that we are seeing right now is consistent with behavior you’d expect to see coming out of a bear market.
The technical picture for gold looks strong, even with the sharp fall at the start of last week after six straight weekly gains. The price came under pressure on the opening of the US Comex market when swing traders dumped an estimated $2.3 billion of futures contracts.
However, as metals strategist Michael Widmer at Bank of America Merrill Lynch noted this week, those bearish bets saw very little sell off in bullish buying. In fact, the flagship Gold ETF, SPDR, added 8 tons to their holdings. He stated further that not only are gold and silver showing resilience at current prices, but comments how the recent action from ‘mercenary swap dealers with the most and largest short positioning for gold are vulnerable to a short squeeze, if the position is right…at some point, gold and silver are going to catch a tail wind strong enough that those attempting to prevent runaway breakouts could be overwhelmed.’
Bearish traders must already be feeling the pressure in the wake of the Malaysian plane disaster, where a commercial plane was shot down flying over eastern Ukraine, killing all 298 on-board. Gold, always sensitive to geo-political upheavals, surged higher, regaining a lot of ground and is now above the key level of $1,300.
With the blame being placed firmly on Russian-backed separatists by the EU and the US, further sanctions which were previously suggested are now almost inevitable, adding further support to the yellow metal. With Russia denying involvement and questioning the West’s lack of evidence proving its involvement in the tragedy, ISIS advancing in the Iraq Civil War and the deteriorating situation in Gaza, gold prices are well supported by geopolitical concerns.
The latest US Federal Reserve minutes for June’s FOMC policy meeting points to further financial uncertainty. Officials agreed to end the central banks’s bond buying program in October, closing the chapter on an experiment that critics have long argued risks causing another financial bubble or excessive inflation, without giving an obvious boost to job creation. Behind the Federal Reserve’s decision to end QE sooner is the view that the economy is gradually strengthening, despite a second quarter contraction of -2.9% in growth.
Whilst apparent that the money printing has done little to stimulate the economy as intended, and numerous indicators recently reporting higher increases in inflation than expected, it has created the fourth biggest bull market in equities since the Wall Street crash of 1929. Stocks have nearly tripled since rebounding from the financial crisis-low in early 2009. But the rise in share prices has not been driven higher by a surging economy or strengthening corporate profits. Earnings season this month so far for companies have been less than encouraging, increasing calls that equities are too expensive.
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A recent study published in May in the US by the PEW Research Centre found stock ownership by households is shrinking, at 45%, down from more than 65% in 2002. Even with the Dow Jones Industrial Average DJIA reaching the 17,000 milestone, investors are leaving stock mutual funds, not buying them.
The price of gold has climbed 11% this year, outpacing gains for indexes of commodities, equities and Treasuries. Investor holdings in exchange-traded products backed by the metal have rebounded as turmoil spreads in the Middle East and Eastern Europe and fear begins to re-emerge in equity markets.
I believe prices may hold close to $1,300 before they move higher due to safe-haven buying as financial market concerns reemerge amid an escalation of geopolitical tensions.