Gold in danger zone but reasons to feel optimistic - TDS

Bart Melek, Head of Global Commodity Strategy at TDS, suggests that the period since the US election has been bad for gold, with prices testing lows near 1,160/oz on Thursday as the yellow metal has plummeted by as much as $177/oz since the highs during the night of the US elections, when gold hit a high of $1,337.51/ oz.

Key Quotes

“This most recent slide lower is no doubt driven by market prepositioning for still higher interest rates amid an anticipation of a fairly healthy November payrolls and sharp rise in oil prices, after OPEC delivered deeper-than-expected production cuts on Wednesday. At the same time the common belief that President -elect Trump will be able to deliver aggressive fiscal stimulus in the form of massive tax cuts and infrastructure spending have also prompted investors to sell treasuries, which has strengthened the USD, increasing both the cost of carry and opportunity cost to hold zero-yielding assets such as gold. The market seems to be thinking that with the US economy approaching full employment on its own (unemployment at 4.9%), higher oil, and the pending Trump stimulus, it will create inflation that will prompt the Fed to be somewhat more aggressive. And, higher real interest rates are bad for gold, as is an ever stronger USD. China's announcement that it will tighten gold import quotas to curb dollar outflows also played a role in depressing the yellow metal on Friday.”

“While the steepening of the yield curve, higher real yields, a supercharged US dollar, and the accompanying lack of investor interest could see prices fall below the current $1,165/oz again, a sustained rout toward the January 2016 lows is unlikely unless the Federal Reserve becomes significantly more hawkish than we expect. But we do acknowledge that given the current technicals, there is a risk of a sharp decline of a transitory nature should the market overshoot interest rates higher.”

“The presence of considerable global economic, political, market risks and considering that the longer end of the yield curve and the sky-high USD have already tightened conditions, the Fed is likely to deliver a dovish hike later in December (relative to positioning). This could mean that rates (and real rates) along the curve may slide lower, which along with the resulting loss of USD upward momentum could prompt technical traders to send gold back into $1,200-plus territory. It should also be noted that long liquidation momentum has run out of steam and could be reversed by such a move, solidifying support.”

“Stronger Indian imports on the back of a healthy monsoon season and the possible rise in hoarding, following the government's "demonetization" policies, could also help prices as China's import quota reductions are at least partially offset.”

“Markets should keep an eye out for the Payrolls data, as any disappointment could be a trigger for at least a partial reversal of the recent gold price drop.”