Gold Is Under Pressure But Should It Be Trading At $1700?

Since then gold has had a solid rally as the combination of negative interest rates on short and long bonds changed the cost dynamics around holding physical gold. At the same time the increased uncertainty in global markets, the apparent loss of efficacy of central bank policy, and a general feeling of rich valuations in financial assets made hold hard asset like gold attractive.

That took it up toward $1380 on two occasions now where it has failed. That level represents the 38.2% retracement level of the $1920 to $1045 fall and is clearly a level traders have been watching.

In the near term with the fed signaling an increased chance of rate hikes, and thus a stronger US dollar, the chances of gold taking out that resistance decrease materially.

But other than that the overall back drop continues to be supportive of gold in a macro sense many would argue.

Overall market uncertainty remains high. Likewise this period of extremely tight ranges in US stocks and the volatility dampening impact that is having on markets globally won't persist forever. And, perhaps more importantly some argue - that fact that global central banks are still expanding their balance sheets.

That central banks are still expanding is the important thesis behind a piece of research from Deutsche Bank (DE:DBKGn) suggesting that maybe gold should be trading at $1700 an ounce.

Deutsche Bank’s Michael Hsueh and Grant Sporre gave in a note that Akin Oyedele picked up on overnight at Business Insider. Akin says the the argument that Hsueh and Sporre make is that gold price percentage changes have historically moved in tandem with the rate of central bank balance-sheet expansions, but gold is not keeping up right now:

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They wrote Friday:

“Over the same period [2005 till now] as the aggregate central bank balance sheet expanded by 300%, global above ground stocks grew by 19% in tonnage terms or c.200% in value terms. If we were to assume that the value of gold should appreciate to keep the overall value of the big four aggregate balance sheet equivalent to that of the value of the above ground gold stocks, then gold should be trading closer to USD1,700/oz.”

They are careful to say that the aren't forecasting gold to trade to $1700 an ounce. But the implication is clear.

What is also clear is that global market thought leaders like Bill Gross at Janus Capital, and PIMCO's multi-asset team continue to suggest that hard assets have value in the current environment.

On a medium term basis gold has plenty of resistance at $1380. But on this time frame if the preconditions come together to see it break that level the yellow metal, and precious metals more broadly, are likely to roar.

In the short term though gold looks likely to test suppost in the $1300/10 zone which if broken could see a $50 cascade. Overall though market atmospherics recommend a portion of gold in many traders portfolios. That in itself is a change from the past few years.

So gold should remain supported on dips in a structural sense.

Have a great day's trading

Greg McKenna

Chief Market Strategist AxiTrader

axitrader.com.au

www.gregmckenna.com.au

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Written By: Axi