As the stock market enters the late stages of its bull run (see my last post Market top ahead? My inner investor turns cautious), inflation hedge vehicles typically rally as inflationary pressures rise. We are starting to see a similar effect in gold prices.
As the chart below shows, the recent weakness in gold prices can largely be attributed to USD strength (green line, inverted). One constructive element for the gold price outlook is the positive RSI divergence as the price tests support.
Washed-out sentiment
Sentiment also appears to be washed out. The latest update of CoT data from Hedgopia shows that the positions of large speculators, or hedge funds, in gold futures are at or near capitulation levels.
Inflation expectations rising
Moreover, gold prices have been lagging as inflation expectations have risen. Even as gold violated an uptrend line, inflation expectations in the credit markets have been steadily rising.
Positive seasonality
Another factor supportive of gold is seasonality. If history is any guide, August and September tends to see an above average probability of higher gold prices.
Key risk
The key risk to the bullish gold thesis is the US Dollar. The USD Index is testing a key resistance level while exhibiting a negative divergence, which should see the greenback retreat and commodity prices rise. However, there are no guarantees when it comes to market behavior. If the USD Index does stage a decisive upside breakout through resistance, all bets are all.
As an aside, the fate of gold prices, and the USD Index has broad implications for Sino-American trade tensions. With the caveat that correlation does not represent causation, Market Commentary observed that Chinese yuan (CNY) to gold stock (XAU) volatility has been falling, which suggests that the Chinese may be pegging their currency to gold.
The volatility of CNY to broad commodity prices tells a similar story.
Should the USD retreat, and gold prices fall, CNYUSD is likely to rise, which would alleviate market concerns about a trade war turning into a currency war. Such a development would act to reduce risk premiums, and be bullish for stock prices.
US sanctions on Iran is likely to force Iran to sell gold and buy US$, as Iran is unable to raise US$s by selling oil. Current dip in gold price may reflect this, however, there is no way to confirm this.
It is equally puzzling why gold prices have come down despite trade skirmishes between US and China. One would have thought that some Chinese money would have found its way into gold, keeping prices buoyant.
I think these are some informative articles by PIMCO on gold but it doesn’t go into specifics like Iran:
https://global.pimco.com/en-gbl/insights/viewpoints/demystifying-gold-prices
https://www.advisorperspectives.com/commentaries/2018/07/28/gold-outlook-brightens
Recent headlines (mostly ignored): record interest expense on the debt and trillion dollar deficits as far as the eye can see — yet during that Au has fallen and at the moment shows few signs of reviving — do these factors (record interest expense and deficits) play any role in supporting or boosting Au?
At the moment Au seems to be the very definition of a falling knife.
Recall I wrote:
If the USD Index does stage a decisive upside breakout through resistance, all bets are all.
Blame the Turkish Tantrum for the flight to USD safety.