Download Gold: are safe havens still the answer?

Gold: are safe havens still the answer?
With the markets settling down after the geopolitical tensions, electorate announcements and what the US decides with fiscal
policy as well as the dovish outlook for the federal reserve. The question remains, are gold prices likely to go up?
With the US revealing higher levels of consumer confidence, the GDP data, the Producer’s Managing Index (PMI) and the
uncertainty of a fed hike could be the tipping point of the spot gold prices.
According to Bloomberg, an article published by Prestige Economics, gold trading is driven by a combination of
fundamental and technical analysis.
Fundamental:
The two key fundamentals are: the inversed relationship between gold prices and the performance of equity markets, as well
as the inverse relationship of gold prices and the US dollar. There are also the short-term volatilities involved in geopolitical
tensions and political factors.
For instance,
With the performance of equity markets, the French election, and the possibility of leaving the EU had created turmoil
within the European indices, investors were looking for defensive havens during the uncertainty, in turn, gold or the
Japanese Yen.
With the strength of the US dollar, the decision to keep interest rates steady after the dovish outlook was given by the Fed,
ultimately weakening the currency. Concerns raised about the core CPI only at 2% (real inflation) and the expectations of a
hike. The US quarterly GDP grow was 0.7%, below the consensus recommendation of 1.1%, this would be likely see gold
enter the bullish market.
The US government can influence the equity markets, if stimulative measures are offered through fiscal policy and corporate
tax rates are lowered – this would benefit the equity market, put simply, if the performance of the Dow Jones or Nasdaq is
bullish, gold prices would likely be bearish.
Technical:
Published by eSignal
The resistance/support levels were similar in mid-December 2015 and late September 2016, shown by the diagonal
trajectory. The Bollinger Band suggests volatility as the lines have shrunk, showing the moving average is ready to contract.
The Parabolic Stop and Reverse (SAR) is placed just below the spot gold, as the rising price trend is losing momentum. The
Slow Stochastic that follows the momentum of price, has cooled down and dropped below the 0.8 (overbought) parameter,
slumping below the bullish divergence. Volume has dropped significantly, at 346.586k, from more than 1M quantity traded
in the previous month.
The US Economy:
The US PMI and construction data was released earlier today, it came below expectations, here are the figures according to
CMC markets:
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US Markit manufacturing PMI 52.8 as expected
US ISM manufacturing PMI was 54.8, below the 56.5 forecast
US ISM prices paid was 68.5, below the 67.5 forecast
US ISM new orders 57.5, below the 64.5 forecast
US ISM employment 52.0, below the 58.9 forecast
US construction spending down -0.2%, below the 0.4% forecast
What does the PMI and construction data mean for the US economy?
It means the US economy is slowing down, with higher than expected ISM prices exacerbated by softening manufacturing,
weakened employment with slumps in new orders – this would suggest stagflation. A decline in construction spending
highlights broader economic weaknesses, this would affect GDP output and growth.
The announcements would likely weaken the US dollar, inversely, strengthen the spot price of gold.
The Federal Reserve:
The dovish outlook has questioned the possibility of a rate hike this year, with the GDP and US PMI data released below
expectations, raising interest rates in June seems unlikely. The contention about holding the cash rate in September would
likely cause the USD to depreciate, as gold would continue to trend upwards from uncertainty and slowed economic growth.
When the Fed decides to hike rates, it would put pressure on the gold prices, the fundamentals could trigger it into the
bearish market.
Recommendation:
There are mixed signals coming up from the fundamental and technical analysis. With the markets settled from geopolitical
tensions, new political conundrums arise from the fiscal policy makers and the dovish outlook of the federal reserve.
Fundamentally, with the steady hold of interest rates and weak economic growth, spot gold prices could continue to trend
upwards. If the Trump administration provides stimulative packages and cuts to corporate tax, the equity markets would
surge from lowered costs and increased production, exacerbating the bullish projection with a bearish pressure.
Technically, gold prices have started to contract. The Bollinger Bands have narrowed down as volatility has dropped, the
Parabolic SAR measuring the price-and-time based trading showing a sluggish momentum and the Slow Stochastic has
dropped below the overbought indication, signalling the start of a bearish divergence.
Commodity prices are cyclical and often, volatile. Gold is used as a defensive haven during uncertainties, forecasting a range
would be difficult.
It would be safe to recommend bullish approach for the fundamental side, but still be cautious of the tax reforms and fiscal
spending the Trump administration would trigger according to the policy makers. The technical analysis indicates the bullish
run is slowing down, with the Parabolic SAR losing momentum, the Slow Stochastic diverging below the overbought
parameter and the Bollinger Bands tightening.