Can Gold Prices Repeat Q1’s Heroic Move?

by James Brumley | March 26, 2014 9:36 am

While it’s true that gold prices have retreated more than a little bit in the latter half of March, with the SPDR Gold Trust (GLD[1]) falling a little more than 5% since its March 14th peak, there’s no denying that gold still has been one of the market’s bright spots since the beginning of the year.QuarterlyReviewOutlook185[2]

As of the latest look, the price of gold is still up 8.8% since the end of 2013. And that gain couldn’t have come at a better time. Gold prices were on the verge of officially going from bad to worse in the latter part of December, and the first quarter’s strong rally restored some much-needed faith in the world’s favorite precious metal.

As the saying goes, though, that was then and this is now. Is the price of gold poised to do in Q2 what it did in Q1? Or, are gold prices going to slump again, pushing the metal to the new multi-year lows it barely sidestepped three months ago? Unfortunately for the gold bulls, it’s most likely going to be the latter.

Not Much Left to Buoy Gold Prices

Not to turn this into a lesson, but boiled down to its simplest components, the price of gold is largely driven by four factors. In the short run, gold prices are inversely correlated to interest rates, and the U.S. dollar. In the long run, gold prices are mostly impacted by inflation and real demand… actual buying (or selling) of raw gold.

Regardless of the timeframe and factor in question, however, the odds seem stacked again gold prices and gold ETFs like the SPDR Gold Trust in the second quarter of 2014.

With that framework in mind, it comes as no real surprise that the price of gold improved like it did over the past three months. In January, the interest rates on the benchmark 10-year Treasury slipped from a January 2nd peak of 3.0 % back to a low of 2.6% by the end of that month.

Then when interest rates (via bond yields) stopped slumping in early February, the U.S. dollar took the reigns of gold’s rally. The U.S. Dollar Index tumbled from 81.32 in late January all the way to a multi-month low of 79.27 by mid-March. That might not seem like much, but it’s quite a bit for currency.

Gold prices versus interest rates and the U.S. dollar

It’s no coincidence that the price of gold started to stumble around the time the sawbuck began to recover. But, with yields not in a position to take back the reins and drive gold higher, the impact on gold was inevitable.

As for the longer-term undertow — inflation and demand while the data is still incomplete for the two factors, we do know that inflation remains minimal at February’s annualized rate of 1.13%[3]. March’s prices aren’t exactly screaming higher either.

And, although the first quarter’s demand data won’t be published by the World Gold Council until mid-May, we do know that demand for physical gold had fallen for four straight quarters as of the fourth quarter of last year[4]. In fact, total gold consumption fell to levels not seen since 2009.

Price of gold versus inflation and consumption

Sure, it’s conceivable that physical buying significantly improved in the first quarter. But it’s not very likely. These strategically-rooted trends simply can’t stop and turn on a dime.

Bottom Line for Gold Prices

Kudos to gold for making the most of Q1’s opportunity, served up first by waning interest rates, and then by a weakening dollar. (The dollar’s dip was the result of several things, ranging from an adjustment to new Fed Chairperson Janet Yellen[5], the ongoing softness of the labor market[6], and Russia’s pseudo-invasion of Ukraine[7], just to name a few).

But, there’s little left in the global ether that could drive those moves again. All the cards have been played, and the present environment is one that should drive 10-year yields to stability somewhere north of 2.6%, while the U.S. Dollar Index holds steady above 79.75. None of that is good for gold prices.

Meanwhile, with inflation still tepid and an unlikely announcement of surprise demand in the cards once the World Gold Council unveils Q1’s reality, the stage is set for gold prices and the SPDR Gold Trust to continue stumbling into — and through — the second quarter.

The bottom line is, gold would do well to even retest the $1354 per ounce level in the second quarter. Though gold prices peaked a tad above that mark in mid-March, the $1354 mark has been a more frequent ceiling since August of last year.

More realistically, the path of least resistance for the price of gold is downward, all the way to the $1180/ounce level where gold found a floor a couple of times last year. The gold bulls should draw a line in the sand there, but if that support level should crack in the least, even just the tiniest slip under that mark could open the selling floodgates.

Gold prices

Whatever the case, tread lightly. As one case see on the weekly chart of gold futures above, the bar from two weeks ago was the second part of a significant engulfing reversal pattern that has followed through quite convincingly.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

  1. GLD:
  2. [Image]:
  3. annualized rate of 1.13%:
  4. fallen for four straight quarters as of the fourth quarter of last year:
  5. adjustment to new Fed Chairperson Janet Yellen:
  6. ongoing softness of the labor market:
  7. Russia’s pseudo-invasion of Ukraine:

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