Gold in an era of Central bank uncertainty

As central banks in developed economies continue to struggle with zero bound interest rates and lack of inflation, Gold prices have been trending stronger. Is this rally sustainable or will Gold resume its bear trend?

Gold prices have enjoyed a strong rally since January this year after prices bottomed out near $1060 in until late December. Gaining over 18% on a year to date basis, Gold’s rally was supported by seasonal trends as well as rising uncertainty among central banks, grappling with low inflation and stuck near the zero bound for interest rates. Adding further fuel to the issue is the talk of negative interest, which came as a surprise from the BoJ late in January. The commodity which has been in a historical bear trend caught many by unawares as the precious metal rallied strongly with little to no pullbacks. At the time of writing, Gold prices retreated from a 13 month high just above the $1280 handle.

So where does Gold go from here and what is in store over the next few months?

Firstly, a brief look at the Central bank decisions since January shows increasing concerns on how to steer monetary policy. While the Fed held rates steady in January, the meeting on March 20th is likely to see another period of rates being held steady in the 0.25% – 0.50% range. The Fed will also be releasing its new economic forecasts which are likely to be less bullish than December’s projections.

Elsewhere, the RBNZ has clearly moved into a rate cut cycle with the surprise 25bps cut in March, bringing the benchmark interest rates to 2.25%, a record low for the RBNZ. The Bank of Japan continues to fight deflationary pressures. Latest inflation figures from Japan shows a slip to 1.10% in February, down from 1.20% a month ago. The BoJ still maintains an optimistic view of being able to reach the 2.0% target rate, a long shot from where inflation currently is in Japan. Understandably, the 10bps rate cut to interest rates, bringing the BoJ in the Negative rate club was met with doubts. The USDJPY aptly showcased this as instead of declining, the Yen rallied strongly.

The latest to join the bandwagon (SNB, BoJ, Danmarks National Bank, Swedish Riksbank) is the ECB, which on Thursday, March 10th cut the deposit rate to -0.4% from -0.3%. The refinancing rate was trimmed down five basis points to 0.00%. The central bank also expanded its asset purchase program from €60 billion monthly to €80 billion a month starting in April 2016.

And in the US, no sooner did the Fed start hiking rates, talks of Negative Interest Rates start to do the rounds. Bank of England officials were also discussing the same at one point not so long ago.

It is not a surprise then that Gold has once again become fashionable. Although the fact still remains that as an investment asset, Gold yields nothing. Goldman Sachs not so recently called the current rally in commodities including Gold as ‘unjustified’ and in fact recommended to sell the rally.

Gold Outlook – Medium Term (6 months)

From a fundamental perspective, Gold is likely to be favored unless the global economy starts to turn the corner. However it is unlikely that this will happen within a few months or even a quarter. On the other hand, further talk of negative rates and more easy money from Central banks is likely to keep the precious metal supported.

Technically, the daily chart for spot Gold shows prices initially breakout from the longer term descending triangle, which was followed by a strong rally breaking the $1185 – $1200 resistance level with ease. What’s interesting is the current rising wedge technical pattern playing out on the charts. A possible breakout to the downside from this rising wedge could see a quick decline in Gold prices back to the $1200 handle which in the past has been a magnet for prices. While Gold remains bullish above $1200, a break below this region (1200 – 1185) could however shift the bias lower with the potential to see the rally fading out.

Spot Gold – $1200 Support will be critical for further price action

While it seems like the strong rally is showing signs of fading following the rising wedge pattern, Gold will see a test of bulls and bears near the $1200 handle. A successful support being established near $1200 should see Gold prices potentially aim for the $1300 mark.

In conclusion, unless the fundamental view shifts and the markets manage to gain more confidence in Central Bank policies, Gold is likely to remain volatile with an upside bias. While it is too early to ascertain whether the commodities in general are moving into a bullish super cycle, keep an eye on Gold and other commodities such as Iron Ore and Crude Oil besides Gold.

This article was written by Dave Goldstein, Head Analyst of Binarybrokerz.com