The Dollar Gold Conundrum

Charles Thorngren
Published: Sep 25, 2017, 10:53 GMT+00:00

Last week has been a nail-biting one for both gold and the dollar. With gold, the action has centered around two key indicator levels - the 21-day moving

Gold US Dollar

Last week has been a nail-biting one for both gold and the dollar.

With gold, the action has centered around two key indicator levels – the 21-day moving average on the daily chart, and the psychologically important $1,300 level.

The $1,300 level was the resistance point back in the first couple of weeks of June. Gold briefly hit this level and then fell back to $1,200 by mid-July.

From here it rallied strongly, eventually reaching the $1,300 level at the end of August. Prices quickly hit new highs around the $1,350 level before falling steadily since.

Gold Chart
Gold Chart

Looking in more detail at the chart above we can see that we have reached a critical time for gold.

Gold Chart
Gold Chart

The US-North Korean tension, the hurricanes in the United States and the general uncertainty the revolves around the US dollar, coupled with the Fed interest rate speculations are all factors that remain relevant to this moment.

One factor which has not materialized is the usual seasonal underperformance of the US stock market. This is confounding many experts who feel that the underlying value of stocks does not stack up on closer examination.

S&P Weekly Chart
S&P Weekly Chart

This is the weekly chart of the S&P 500 since January 2016. The rise in prices has been steady and prolonged and has now reached the critical $2500 level.

This surge in record highs is not confined to the United States as markets are beginning to attract investors in European and Asian stocks too.

We believe there are five things that should be noticed at the moment:

Central banks policies – central banks have been supplying the money to the markets for years with quantitative easing that enable them to have cheap stimulus packages. They have also been trying to get investments back into their domestic economies, by purchasing bonds from financial institutions, and hoping that this money gets reinvested.

The European Central Bank has started to end its bond-buying programme same as has the Bank of England.

In the US, the Federal Reserve has raised interest rates twice already this year and another is muted for December.

Europe is back in the fray – after the 2008 financial crisis, Europe seemed to implode, with problems in Spain, Portugal, and Greece at the forefront of its travails. Reforms were put in place to reinforce the more jittery economies, and these seem to have worked. Although the bailout programme for Greece is still ongoing, Europe seems to be turning around. Annual growth for the Eurozone is 2.3%, by way of comparison, US growth is stalled at 2.2%.

There seems to be a relaxation of political concerns – President Trump’s proposed spending spree, together with his plans for tax cuts sent the markets higher, of course, but he has been unable to get some of his key legislation through. Healthcare is the most obvious example.

In Europe, the election of Macron in France and the election of Angela Merkel in Germany came out in line with market expectations, as these leaders reinforce the stability that they are looking for after the scares of far-right extremists almost reaching government.

Asia, of course, is a different story.

North Korean tensions – who knows where this is going. After six nuclear tests, and two rockets fired over Japan and an increasingly belligerent Pyongyang saying that strikes on the US mainland are “inevitable”, people are certainly jittery. The markets were, initially, reacting instantly to any missile launch by Kim Yong Un, however, they are now, increasingly, met with a shrug.

This is backed up by views like that of the chief market analyst at CMC markets, Michael Hewson, who said: “Tensions with North Korea are likely to remain a distraction, however, markets appear to be becoming desensitised to them at this time, and short of shots being fired, these tensions are likely to have fairly short-term and short-lived effects.”

It is widely believed that the Japanese Prime Minister, Shinzo Abe, is going to call a snap election this week. He has been trying to reform the constitution of Japan for some time, without success, and this move is widely believed to be an attempt to bolster his ability to push through his measures. The gamble could backfire and actually weaken him. This could have an effect on the Asian stock markets as well.

China’s economy has steadied – it has been a concern for a while, that China’s economy had stalled, recent signs from the world’s second-largest economy are not as bad as expected. Although retail sales and industrial production were down in August, China is sustaining an annual growth rate of 5%, according to analysts, and the yuan continues to hold its strength.

The dollar edged higher in the previous week, against major currency pairs. It remains weak, but the Fed announcement to reduce its balance-sheet which will help it regain some ground.

In the long term, according to the monthly chart of the dollar index, the US dollar holds the 50 SME and the 2016 lows as support. The recent drops in the dollar are seen by technical analysts as a wave 4 correction, at about the 92 level. According to this theory, the next wave – wave five – will see the dollar rise back up to the 104 level and beyond.

Gold, of course, is reactive to all of these events. As can be seen from the graphs above it has reached a critical point, technically, according to the charts. The dip in the gold price from its recent highs could simply be a retrace to test support or it could be the start of a new trend.

The market is currently focused on rates and that the geopolitics is a secondary concern. Any escalation of the situation in North Korea, or even Iran, could turn that assessment on its head.

Noble Gold specializes in IRAs and 401(k) rollovers through precious metals and cryptocurrencies investments.

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