Is the Gold Rally Over?

Since the US Election gold has been following has been following the ebbs and flows of Mr. Trump closer then the world follows his Twitter account. But there has always been a bigger gorilla in the room. The Federal Reserve.

Lost the noise of the financial markets since Mr. Trump’s win has been a much bigger theme and one that will perhaps define 2017. That is the bottom of US interest rates and a Federal Reserve seemingly very intent on raising rates at least three times in 2017. The street has perhaps lost sight of the implications of this moment. As the defacto reserve currency of the world (despite China’s best efforts) which by far and away most of the world’s international commerce is conducted in, it has far reaching implications. Higher US rates will

Higher US rates will feed through to higher rates in many other countries, particularly emerging and not so emerging nations with USD or quasi USD pegs. The nature of pegs means that monetary policy is outsourced to the country you peg to. In this case the United States. As interest rates rise there, rates must by default rise in the pegged countries with far reaching implications for funding for economic growth, finance debt, and current accounts, etc., etc. The alternative is to burn through foreign reserves to defend the peg or move the peg which in itself could stoke inflation. After ten years of addiction to zero percent QE money, the global withdrawal could be quite emotional in 2017, particularly if a nation’s economic cycle is not aligned with the USA’s.

Overnight Fed Chair Janet Yellen started sounding decidedly hawkish. With CPI this week hitting 2.1% YoY with core CPI at 2.2% YoY, and industrial production up 0.8%, Ms Yellen stated that ““It is fair to say the economy is near maximum employment and inflation is moving toward our goal,” so that “it makes sense to gradually reduce the level of monetary support””. Ms. Yellen gave the knife a further twist stating ““I and most of my colleagues” were expecting last month to increase the benchmark lending rate “a few times a year” through the end of 2019.” So the data is clearly tracking the right way, and Federal Reserve clearly has rate hike itchy trigger fingers.

US Yields duly rose across the curve, equities gave back some gains, but the largest effect was seen on the USD itself. Rallying not only against global currencies but also commodities such as oil and also precious metals. From a technical perspective, the price action in Gold has been significant.

GOLD

Looking at the chart below, we can see two clear channels making a v-shape pattern. Gold itself has following Trump sentiment in a close formation the Blue Angels would be proud of.

Following Mr. Trump’s win and the reflation USD rally “Trump-pump,” Gold moved textbook style in a downwards channel as the world piled into USD and US rates moved higher reducing gold’s appeal as an asset. Falling from around $1230 to $1125 until a break out of the down channel at $1140 heralded a strong rally.

This of course coincided with the New Year’s “Trump-slump” where his Twitter account, profit taking and reality biting risk aversion restored Gold’s safe-haven bid. Gold has since rallied back above $1200 in a textbook up-channel. This has come to an end this week as both data and Ms. Yellen sees Gold finally break out of up-channel rather ominously to the downside.

Significantly Gold failed at its earlier high at 1220 and never got close to testing resistance from December at $1233. Gold now has resistance at $1205, the 100-day moving average, $1220 and  $1235 the aforementioned levels. The break of the channel from a technical perspective opens a move back to the $1120/25 area and any interim support is hard to find on the daily chart.

Gold Daily

Summary

In the noise of the Trump victory the elephant in the room for  2017, higher US rates, seems to have been lost.  Gold has followed the Trump pumps and slumps slavishly. However, the Federal Reserve is flexing its muscles and from a technical perspective, Gold’s rally could well be over with substantially lower levels implied.

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