Gold Prices Will Move Sharply Quietly Higher
Despite recent pressure, famed investor and gold expert Dennis Gartman says he’s “reasonably impressed” with the metal’s performance, especially as sister commodity crude oil struggles.
“Given the fact that crude has been under some very real pressure over the last month or so, you have to be reasonably impressed that gold has, at least, held its own,” the editor and founder of The Gartman Letter told Kitco News in a phone interview Tuesday.
In June, crude oil tumbled to a low of $42.05 a barrel, a level last seen in August 2016. West Texas Intermediate (WTI) crude oil has since rebounded. Meanwhile, gold prices are higher Tuesday following Monday’s steep sell-off, last at $1,223 an ounce in electronic trading.
And, despite the recent noise in the gold market, Gartman remains bullish on the metal.
“I hesitate to say there’s any great short-term correlation between the two,” he said. “On balance, gold prices whether in dollar, euro or yen terms, I think gold wants to move quietly higher.”
Even if there are negatives ahead for gold prices, like the Federal Reserve’s plans to tighten, Gartman said he is impressed by the metal’s resilience this year.
“The psychology is overwhelmingly bearish and yet gold prices are not making new lows, that is worthy of note,” he said.
Gartman also had very harsh thoughts on the new gold in town: cryptocurrencies. And, to the longtime investor, the leading crypto bitcoin has already seen its high.
“I don’t think there’s any question bitcoin saw its high a month ago and the fact that ethereum had its blow up last week shows you how tenuous are the underpinnings of that market.”
Despite his bearish assessment on the virtual currencies, Gartman said he thinks blockchain technology is “genius” and wouldn’t be surprised to see the technology used to trade stocks in the future.
However, he does not view these new forms of exchange as a currency.
“The reason for bitcoin to have been created was ostensibly to be used as a purchasing mechanism, like dollars; but if something is able to move 15-20% in the course of a day, how can that possibly be used as a purchasing mechanism?” he questioned.
“I think it’s the most comical, ludicrous, and silly notion to come down the pipe since tulip bulb mania of the 15th century.” – Sarah Benali
FOMC Minutes Have Potential To Shift Sentiment in Gold
As gold prices are facing additional pressure from a more “hawkish” Federal Reserve, TD Securities is still expecting gold to do well in the second half of 2017, with this week’s main triggers being the FOMC meeting minutes and the U.S. jobs report.
“Moving forward this week, important US economic data will be the likely driver for the precious metals. Specifically, the FOMC minutes from June on Wednesday, along with the June jobs report on Friday, will be the major events this week with the potential to shift gold sentiment,” TD Securities’ commodity strategists Ryan McKay and Daniel Ghali said in a report.
The U.S. data this week will help the market figure out whether or not the Fed’s more “hawkish” tone, along with its plans to begin offloading the balance sheet, is in fact justified, analysts wrote.
“The jobs report will indeed be important in shaping the markets expectations of the Fed’s ability to follow through on these goals.”
If the data disappoints, gold prices are bound to recover and traders might start viewing the Fed’s projections as unrealistic.
TD Securities added that no matter the outcome this week, the yellow metal is expected to do well in the second half of 2017 as “it may turn out that the latest rate hike and the Fed’s ‘hawkish’ stance is more bark than bite.”
Key drivers to watch for gold prices during the rest of the year are: Brexit, North Korean missiles and the Italian elections.
U.S. President Donald Trump’s ability to deliver on promised reforms should also be carefully monitored by investors, according to TD Securities.
“The equity market looks priced for perfection and may well come under selling pressure if rates move higher or if the Trump administration does not deliver stimulus in the form of lower corporate and personal taxes, which looks increasingly likely,” McKay and Ghali said. – Anna Golubova
Downward Momentum in Gold Prices May Prove ‘Limited’
Even if gold prices have seen sharp selloffs recently, one analyst says its downward momentum is coming to a halt.
“[E]ven in a worst-case scenario (i.e., a negative swing in speculative sentiment toward gold), the downward pressure in gold prices may prove limited,” noted Boris Mikanikrezai, precious and base metals strategist for FastMarkets, in his Gold Weekly report Tuesday.
In his analysis, the London-based analyst looked at speculative positioning as well as exchange-traded fund holdings in gold to make his point.
He highlighted the latest CFTC Commitment of Traders report (COTR), which showed that money managers cut their net long positioning for a third straight week over the reporting period (June 20-27).
However, even if speculative sentiment seems to be turning negative, which could lead to lower prices, Mikanikrezai noted there are two developments that are encouraging.
“First, gold prices remained broadly resilient in spite of the magnitude of the wave of speculative selling over the reporting period, which suggests perhaps the presence of physical buyers ready to support prices,” he wrote.
“Second, the net spec length in gold now represents just 27% of its record, suggesting that there is limited room for additional speculative selling.”
And, even if flows remain less aggressive than last year, the same can be seen with ETF holdings, he continued.
“The fact that they were net buyers in June suggests that investor sentiment remains strong, with ETF investors inclined to accumulate on a steady basis,” he said.
“Going forward, I suspect ETF investors will continue to accumulate gold at a slow pace in order to have diversified portfolios, but the pace of inflows may become stronger in case of a sudden wave of risk aversion, forcing some too-complacent investors to boost their exposure to safe-haven assets like gold.”
Mikanikrezai said he is long SPDR GLD, the world’s largest gold-backed ETF, as he expects a bullish breakout pattern to materialize.
“I think it is important to adopt a cautious attitude toward gold prices at this stage, because one cannot rule out a repeat of the ‘Taper Tantrum’ a la 2013,” he said.
“I need to see a firm daily close below the May low of $1,214 per oz before closing out my bullish bet and reassess the situation.” – Sarah Benali
Rising Inflation Could Serve as a Catalyst for Gold ETFs
Gold exchange traded products, including the SPDR Gold Shares (NYSEArca:GLD), iShares Gold Trust (NYSEArca:IAU) and ETFS Physical Swiss Gold Shares (NYSEArca:SGOL), are each up about 8% year-to-date. Historical seasonal trends indicate the yellow metal could be a buy right now.
The good news for gold ETFs is that inflation could serve as a catalyst for the yellow metal. Rising inflation could also prove to be a catalyst for gold ETFs. By some metrics, the Fed has under-estimated U.S. inflation, which could prove beneficial to gold prices because the yellow metal is historically a popular inflation fighter.
Another possible catalyst for gold prices entering the back of the year is lingering debate surrounding how many times the Fed can raise rates this year (one more is what many traders are betting on) and in 2018 (three seems to be the bet there).
“The gold price enters one of its two historically strongest parts of the year, which should be good also for the GLD investors. The table below shows the monthly performance of gold futures (price data provided by Stooq), over the last 48 years. As can be seen, every month has experienced some great as well as some poor returns over the last five decades. However, some of the months are able to outperform in the long term,” according to a Seeking Alpha analysis of gold.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield. That scenario implies bullion will be helped if the Federal Reserve declines to raise rates later this month.
“Over the last 48 years, the highest average returns were recorded in January (2.0%), followed by July (1.58%), May (1.57%) and November (1.37%). On the other hand, the worst months for the gold investors were October (-0.48%) and June (-0.38%). As can be seen, the best seasons for gold are winter (November – February) and summer (July – September),” according to Seeking Alpha.
Year-to-date, investors have added $1.37 billion to GLD, the largest gold ETF. That includes second-quarter inflows of $916 million. – Tom Lydon
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