As difficult as it might be to believe, gold prices essentially ended the first quarter of 2015 where they ended the fourth quarter of 2014.
That’s right — the sharp slide in gold prices and the SPDR Gold Trust (ETF) (NYSEARCA:GLD) between late January and mid-March was mostly an offset of the surge at the beginning of the year. The rest of the pullback was regained over the course of the past two weeks.
It’s the kind of volatility that makes gold investing a real headache … and it’s not like silver prices were any less erratic during Q1. Traders need not throw in the towel, however. They just need to take a step back and look at the bigger picture.
Here’s some perspective to make sense of gold and silver in the second quarter.
Gold Prices Driven by the Dollar
While gold prices have been pressured lower since late 2011, the weakness seen since July of last year has almost entirely been spurred by the meteoric rise in the value of the U.S. dollar.
The U.S. Dollar Index — and its corresponding ETF, the PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) — soared a stunning 20% between early July and mid-March, reaching new multi-year highs in the process. Because gold is priced in U.S. dollars and is inversely correlated with the greenback, this rally was matched by weakness in gold prices.
Once the U.S. Dollar Index regrouped from a stall in February and began to rise again, the dollar’s feeble rally reversed, sending gold back to a multiyear low of around $1,142 per ounce. Even the bounce-back in the meantime has only pushed gold prices back up to around $1,200.
What happened in mid-March, however, is where the discussion gets more than a little interesting.
Whether they want to admit it or not, much of the reason the dollar’s bulls have been so willing to take a strong position in the currency has been speculation that the Federal Reserve would soon begin a string of modest, but measurable, interest rate hikes.
Higher interest rates tend to coincide with rising inflation, which, in turn, tends to correlate with a stronger currency for that country. In other words, buying the dollar and/or selling gold was a speculative bet that the Fed wasn’t just dishing out idle chatter earlier in the year when it telegraphed an interest rate increase was looming.
As we learned two weeks ago, though, Janet Yellen isn’t nearly as ready to raise interest rates as many traders were assuming up until two-and-a-half weeks ago. That shocking revelation sent the dollar tumbling, and sent gold prices back into an uptrend.
The $64,000 question: Is the greenback going to keep falling, or has it already resumed a longer-term uptrend?
Answer: Anything is still possible, but given the still-overextended status of the U.S. dollar — in addition to the fact that the greenback’s recent bulls have likely overshot with their expectations of what the Fed’s going to do (in terms of timing and severity) with interest rates — the dollar’s tide has likely shifted for the worst.
Ergo, the undertow for gold prices has likely turned for the better, at least for a while. The trick is figuring out where the near-term and long-term tops are apt to form.
Gold Investing Outlook for Q2
While more of the same volatility is apt to be in the cards, that volatility is likely to be net-bullish. But, none of the usual key moving average lines are helping on that front. The only framework that makes a great deal of sense is Fibonacci lines. The nearest one is the 38.2% retracement line at $1,397. It’s “up there,” but wouldn’t mark an out-of-character move for gold prices.
As for silver prices, the same basic premise applies. That is, the undertow has turned bullish, and Fibonacci lines are likely to serve as the guideposts. The first and most meaningful one on this chart is also the 38.2% retracement line, at $28.80 per ounce.
Admittedly, there’s still quite a bit of pessimism regarding gold prices for the foreseeable future. Bank of America Corp (NYSE:BAC) seemed to have one of the firmer, more rational grips on gold in the near-term, though, considering comments made by BAC’s MacNeil Curry late last week. He said:
“Rates are headed lower, and the dollar is likely to remain in a corrective sequence in general. Gold should rally in that environment… The big thing here is that we’re going to see continued breakdown in the negative correlation between gold and the dollar over the course of the next couple of weeks… If you look at the price action, it says gold should probably resume higher.”
Curry called for gold moving to $1,307 per ounce by May, which is roughly halfway to the $1,397 level where that first Fibonacci line lies. If gold prices make it back to that level again, though, momentum may well carry it the rest of the way to the higher target price.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.