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29 Apr 2016
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15 Apr 2016
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11 Apr 2016
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05 Apr 2016
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It’s very early days as far as the second quarter is concerned, but gold is struggling to recapture the upside momentum it enjoyed over the first three months of the year. At the beginning of March it finally cracked above resistance around $1,240 and quickly traded above $1,280 to hit its highest level in over 12 months. But now it’s struggling and $1,240 is resistance once again.
  




     
It’s easy to understand the renewed interest in gold. The increased adoption of negative interest rates by central banks means that the lost opportunity costs of owning a commodity that pays no interest itself is less of an issue. In addition, many investors are concerned that economic growth remains tepid in developed countries such as the US, Japan, UK and across the euro zone. Growth continues to slow in China while other BRIC countries (remember them?) have their own issues to deal with. This is despite seven years of unprecedented monetary stimulus which only appears to have pushed up asset values. This is particularly noticeable if one considers equities, bonds and property prices. With these assets trading at “elevated” levels, many investors are happy to diversify their portfolios by adding gold into the mix. This is especially the case as gold appears to have put in a double-bottom in December at a multi-year low around $1,040.

“It is a truth universally acknowledged” that one of the key drivers of gold, when priced in dollars, is, of course, the US dollar. The dollar goes up; gold becomes more expensive, so demand goes down and the price follows. More often than not this is true. The all-time record gold price (in nominal terms) was hit in the summer of 2011. This corresponded to a low point for the US dollar against a basket of currencies which hasn’t been revisited since, and an all-time low for the USDJPY below 76.00 - BOJ look away now. So it’s worth keeping an eye on the EURUSD and/or the Dollar Index.
    



     
Looking at this chart suggests that the EURUSD is currently in a gentle uptrend. So the dollar has pulled back since early December and this is supporting gold. But the chart also suggests that there’s some resistance coming in around 1.1420 or so – the 0.76 Fibonacci Retracement of the Aug-Dec sell-off. So gold could continue to struggle to push higher if the EURUSD pulls back from here (the dollar strengthens).

However, there are times when gold does its own thing irrespective of whether the dollar is up or down, or if investors are worried about inflation or deflation. Sometimes it just acts like money and also a store of wealth. That’s when it’s worth owning and the real gains are made. Who knows if we’re approaching that time or not? But gold is no longer the unloved rock it was at the end of last year.

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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