The bull market in the dollar index remains very much alive, but if the Fed surprises dovishly today, it is possible that technical and psychological support at 100 is violated which would lead to a pull back into the upper-90s.
Copper futures finally violated the post-election uptrend yesterday suggesting that some profit-taking will likely occur in the coming sessions. $2.50 should be looked to for initial support in the US futures contract.
WTI crude oil futures surged last week, but have yet to materially break out of their multi-quarter trading range between $40 and $50/barrel. Today, focus will be on the weekly EIA inventory report to see if the data can help propel the energy market back to fresh highs.
Since the unexpected Republican sweep in the US elections, the combination of strong growth expectations and more recently, upbeat Chinese manufacturing data has spurred an impressive rally in copper futures.
Gold futures declined yesterday, initially thanks to a stronger dollar; however, a reversal in the greenback saw precious metals close well off the worst levels of the day. Gold futures declined 0.34% on the day.
It is clear that the precious metals market, specifically gold, has gotten crushed since the election, and there are a lot of investors wondering if now is the time to buy.
The simple answer is, “Not yet.”
Longer term, given The Sevens Report is positive on inflation, gold will rally again, but The Sevens Report needs to see higher inflation to offset two strong headwinds on gold near term.
First, a lot of this reversal was thanks to the unexpected election outcome that initiated the rally in the dollar to multi-year highs. When the dollar rallies hard, gold will fall every time. Going forward, the dollar rally will need to level off in order for the gold market to materially stabilize. The Sevens Report long-term upside target for the Dollar Index is between 106 and 107, so until The Sevens Report see those levels (or signs of a significant reversal in the greenback confirmed by some sort of fundamental altering event) the outlook for gold is not very bright… until The Sevens Report sees an acceleration in inflation.
Aside from the dollar, the real interest rate (nominal interest rates minus the inflation rate) has offered the best fundamental read for the gold market.
In the wake of the election, inflation expectations did not materially change; however, nominal interest rates surged in a big way. That resulted in a spike in real interest rates, and that’s very bearish for gold.
When inflation accelerates, and starts to outpace rising interest rates again, The Sevens Report will see gold as an attractive investment like it did earlier this year.
Remember, Treasuries were trading sideways this summer and inflation was firming, which led to declining real interest rates (which is bullish gold). But if the trend in interest rates is materially higher and inflation remains well contained, gold will likely fall further.
To be clear, gold and the dollar can rally together, just not while the dollar is moving as swiftly as it did post-election. If inflation shows signs of getting out of hand, and the Fed is perceived to be “behind the curve,” then gold can rally (because real interest rates will decline as inflation accelerates despite a rally in the buck).
Technically speaking, the trend is lower in gold, and there is not much support before the $1130-$1140 area. To the upside, retracements to resistance at either $1210 or $1225 should be normal throwbacks in an otherwise downward trending market.
Bottom line, gold is not a buy now. But as market conditions settle, The Sevens Report will look for the two key components necessary for a new rally in gold… the dollar leveling off and real inflation rates showing signs of declining as actual inflation edges higher.
The S&P 500 rebounded from morning losses to finish the session at yet another record closing high. The post election price action has been impressive and continues to strongly favor the bulls for the medium term.
Gold futures continue to hold on to critical support in the low $1200’s for now, but if the dollar rally continues, it will likely end the short-lived bull market we pointed out back in April.
The S&P 500 printed an “inside bar” on the daily chart yesterday which is historically a signal of indirection. But the bulls have momentum on their side since the election, leaving the path of least resistance higher.
Oil futures got caught up in “risk trading” during the election drama. Energy futures sold off hard with global stocks overnight Tuesday and then surged higher as money poured back into risk assets on Wednesday. That was about the extent of the effect that Trump had on the energy markets at least so far.
Tyler Richey, Co-Editor of the Sevens Report, said “Policy wise, it isn’t exactly clear yet how a Trump administration will affect energy markets, however it is fairly safe to assume that he will be pro-US oil and that could tighten or even reverse the arbitrage spread with the global benchmark Brent contract which trades at a premium to our domestic WTI contract.”
Market focus returned to the bearish fundamentals in the back half of the week once the election drama subsided. Most notably, doubts about OPEC reaching any sort of production deal later this month has become a notable headwind. OPEC members have been successful in jawboning the market higher in recent months but traders are beginning to get skeptical as they are saying one thing (“we are going to cut”) and doing another (pumping at or near record highs).
Additionally, the US fundamental backdrop is bearish as production has stabilized above 8M b/d in the lower 48 as rig counts continue to climb while stockpiles are near all-time highs.
Richey, “Bottom line, the trend in oil prices is currently lower and the fundamentals are decidedly bearish for the medium term, leaving the path of least resistance lower as we approach the end of the year.”
Volatility in the gold market has been extreme this week as the initial flight-to-safety reaction to the election results spurred a huge rally but money flows quickly turned risk-on and gold has since collapsed.
Heading into the election there were a lot of investors piling into gold as a hedge and while that position worked overnight on Tuesday, it has since become a losing bet and you are seeing longs get squeezed out as they cut losses.
Looking ahead, this price action in gold is rather discouraging for the bulls however we are not throwing in the towel on our long call just yet as we still see the risk reward of being long gold here as favorable. On the charts, support holding between $1200 and $1220 is now critical for the health of the relatively young uptrend in gold (technicals turned bullish in April).
Silver has a split personality in that it can trade in sympathy with both the industrials like copper or precious varieties like gold. Over the last few days, silver has outperformed gold as futures rallied in sympathy with the historic squeeze in copper futures in the wake of the election. But, the copper surge is showing signs of exhaustion this morning and the new lows in gold are starting to weigh on the dual-purpose silver contracts.
As volatility subsided yesterday in the wake of the election and money flows were still largely “risk-on,” gold futures came under pressure and are now testing key support at $1250/oz.