Gold Has Lost Its Lustre - Where To Now?
Axi | May 10, 2017 12:02
Originally published by AxiTrader
Gold fell to $1,214 overnight as the reversal from long-term resistance continued under the weight of rising us bond rates, low implied volatility, and a stronger US dollar.
Increasingly it is looking like prices are headed for a full round trip to the start of the rally in the vicinity of $1194.
But before I get to the technical outlook I want to talk about the relationship between gold and interest rates.
Last night Kansas City Fed president Esther George again reiterated that the Fed should not be swayed from the path to higher rates and that it should soon begin the process of tapering its massive $4.5 trillion balance sheet
That's helped US two-year rates hit their highest level in two months of 1.35% which is just 6 points below the high for the year so far. For gold the importance of this is that its price has a strong directional correlation with the level of, and moves in, US interest rates.
I've inverted the price of gold in the chart above to show the impact of this relationship with interest rates, and the US dollar. And what's obvious is that gold's attempt on the long-term trendline at $1295 was synchronous with the 2-year note's fall below 1.2%.
It didn't hurt that the US dollar, at least in US Dollar Index terms, was also under pressure.
But as the market has become convinced that the Fed is on track to raise rates in June and begin the taper of its balance sheet this year so then has gold come under downward pressure. Likewise, if I overlay the 3-month CBOE Volatility Index measure for the S&P 500 - known as the VXV - you would see also that as volatility has fallen so too has gold.
Essentially that means there is less demand for a safe haven because traders aren't fearful of market ructions at the same time that a stronger dollar and higher interest rates also reduce gold's lustre.
All of this is coincident however, and gold would react swiftly to either a material deterioration in US data or a reignition of real geopolitical tension in North Korea or Syria.
Looking at the gold chart however, the chances of a full retracement to $1,194-$1,200 have increased. That level is important support and a break could signal a move toward the $1,130/50 region. You can see it best in the weekly chart below.
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I like gold fundamentally. I think that volatility is way too low in a still uncertain world. But at present my system says there is not yet a reason to buy.
Have a great day's trading.
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