If Powell Is In & 2017 is Over, Is Gold Headed Up?

  • 7 Nov 2017
  • By Henry Park
  • Topics: Metals

Gold prices are up 10% this year and settled last week at $1,270.20 per ounce.  Gold prices may be setting the stage for further price advances, but for the moment, needs to consolidate recent gains first, as we head into the end of the year.  Gold is a major commodity traded around the world and has historically been a store of value, but its market price has largely been determined by monetary policy in the US, since gold is quoted in the currency of the US. As the US currency has fallen, less dollars are needed to buy the precious metal.  Following news last week from the US, it appears that this trend is not likely to end anytime soon.

On Thursday, US President Trump announced his nomination of Federal Reserve Bank Governor Jerome Powell to serve as the next chairman of the central bank.  Since Chairman Paul Volcker, the Federal Reserve has been led by “doves” for chairmen.  Generally, A “hawk” is seen as any voice who stresses the need to fight inflation over the need for economic stimulus, while a “dove” is seen to embrace inflation in return for robust growth and employment levels.  Commodity investors welcomed the announcement, since Governor Powell is seen as a dove in the tradition of his predecessors, and gold has certainly been a beneficiary of a dovish monetary policy.

Source: seekingalpha.com

But gold prices may need to wait until the end of the year before any rally, due to several factors.  First of all, gold’s status as a “safe haven” asset is firmly established, but falling tensions between the US and North Korea have stopped the panic buying the precious metal we saw earlier in the summer.  Since word of an earthquake near a North Korean nuclear testing site, the rogue regime has been very quiet on the world stage.  Second, gold imports out of China and India, the two largest users of gold, have weakened considerably over the past few months.  Third, a declining gold/silver ratio indicates that other precious metals are more attractive on a relative value basis than gold.

But most importantly, the biggest obstacle for higher gold prices this year is the expected interest rate hike from the US Federal Reserve in December.  Many strategists are now declaring gold to be “dead money” as we close out 2017.  An interest rate hike works against gold as it is an inflation-fighting measure, designed to halt inflation before it can take hold in the economy.

But what happens after the expected Fed hike?  Recent history has shown that gold traders wait to buy until after a hawkish interest rate decision.  After the last two year end rate hikes, gold began long multi-month price rallies.  In 2015, interest rates were raised for the first time in 10 years, but gold simply shrugged it off and charged higher.  It was the same in December of 2016.  The fact that gold is still up 10% in 2017 despite two additional rate increases this year is evidence that gold demand is still there.  

Nimble gold traders have been switching out of precious metals ahead of Federal Reserve Open Market Committee (FOMC) decisions, and switching back in after the anticipated event occurs.  There is no way to tell how long a certain market behavior persists into the future, but it may be helpful to take a look at how gold traders are positioning themselves at the moment.

On a monthly chart, gold is still clearly in a multi-year bull market, so longer term investors will look for an attractive level to add to positions.  After a powerful bullish rally took gold to $1900/ounce, a strong price correction began in 2013, which retraced back down to the $1100 level.  And prices have been consolidating for 4 years around the $1200 level. 

On the weekly chart, there is rising trend line of support (in yellow), drawn from the powerful rally which began after the last December rate hike by the Fed.  Time consumed until the end of 2017 should take the support line up to around the $1220 level.  

On the daily chart, gold broke out to new yearly highs in August and corrected roughly from $1360 to $1270, a decline of $90 per ounce.  The current price consolidation attempted a rally back up to $1310 before dropping back.  The clear rally and correction indicates that we may see a “measured move” (in red arrows), which is a second attempt to extend the direction of the previous price correction before a potential reversal back up.  A measured move will typically be similar in proportion to the first leg of the correction from a new high, so a $90 move from $1310 should take us to $1220 per ounce by the time December ends.

charts by: ThinkorSwim

With no other major global events in the news, gold traders may feel emboldened to try the long side of gold again then. 

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