There’s no getting around it — this year has been miserable for fans and followers of gold. Between a rising U.S. dollar and a distinct lack of inflation, the gold price trend has been understandably pointed downward all year long.
The odds are slightly in favor of such a rebound, albeit a modest one. Even so, the commodity has a lot of technical work to do to muster a rebound, and that assumes that the proverbial planets line up on the fundamental front.
A Year to Forget
Gold prices started the year out on a very bullish foot — the SPDR Gold Trust ETF (GLD) was up close to 10% between the end of 2014 and Jan. 22.
It wasn’t strength built to last, however.
Following the early surge, the subsequent gold price plunge over the course of the next 11 months was just painful. Even with the bounce effort that began last week, gold is still down nearly 9% year-to-date, and is down more than 18% from its January peak.
The reason for the renewed collapse of its value (the gold price collapse actually began back in late 2011, and got going in earnest in 2012) isn’t a difficult one to understand.
As was noted, aside from strength of the U.S. dollar, the gold price trend has remained bearish simply because the biggest reason to own gold — as a hedge against inflation — has been practically non-existent when factoring in uber-cheap crude oil.
Even with crude taken out of the equation, inflation has remained tame.
The end result is a gold price chart that’s broken under any possible sort of support level and has yet to look back.
While a short-term bounce may be in the cards, it’s going to take a major, concerted reversal effort to stop the bleeding over the long haul. Then again, the bearish reversal that materialized in September of 2011 decisively snapped an uptrend and was completely unexpected.
In other words, you can’t afford to assume anything about gold here.
Factors in Play
Although the near-term price trends for gold are fueled by sentiment, in the long run (and not-so-long run), gold’s so-called “fundamentals” push gold prices around.
Those fundamentals are a combination of the U.S. dollar and inflation; specifically, both the strong U.S. dollar and tepid inflation work against gold prices, while a weak U.S. dollar and strong inflation work in favor of gold prices.
Interest rates and consumption (vs. supply) are secondary factors, largely driven by the first two factors.
There’s been little doubt as to what sort of trends the U.S. dollar and inflation are in right now. That is, the U.S. dollar is knocking on the door of multi-year highs again, while inflation has been tepid — at best — overall, and almost non-existent when factoring in the price of oil. Both would have to reverse course if gold were to have any shot at recovering in a meaningful way.
Thing is, both inflation and the U.S. dollar are ripe for a reversal that may well do the same for gold.
Although the relationship is tenuous, rising interest rates generally tend to drive that country’s respective currency upward.
Given that the U.S. just logged its first rate hike in years and the Fed’s governors expect to raise rates more in the foreseeable future, one would think this new monetary policy outlook would be poised to work against gold prices.
Inasmuch as the U.S. Dollar Index has advanced 20% over the past year-and-a-half, however, it’s arguable (even likely) that the market has already priced in a string of rate hikes and then some.
With the impact of rising rates already in place, the market may not inflate them even more. We may even see the U.S. dollar decline with rising interest rates.
As the saying goes: Buy the rumor, sell the news.
As for inflation, that’s working in favor of gold prices in a more straightforward manner.
While inflation has been practically nil for the past year, cheap gasoline prices are the reason. Consumer costs in most other categories were up 2% on a year-over-year basis as of the most recent report.
Think about the timing of the crude oil implosion, however. We’re nearing the one-year point for the bulk of the meltdown. From February on, the year-over-year comparison of gasoline prices won’t look as favorable, even though gasoline will still be dirt cheap on an absolute basis.
All the same, once we reach that one-year mark the calculated inflation rate will perk up, and that will drive new demand for gold. The question is, to what degree? It may be enough to turn the supply/demand tide back to one that drives a higher gold price.
Again, though, it’s going to take a lot of technical work to change gold’s price trend.
Gold Price Outlook
At the very least, the bearish gold price trend appears to be running out of steam — we should see gold futures stabilize in 2016, if only because there’s no blood left to give and traders are losing interest altogether. That’s a subtle bullish sign in itself.
In the meantime, the bulls have already stepped up to the plate at a key support level that could end up serving as the push-off point for a rebound.
That said, don’t go bottom-fishing. Gold is still a huge question mark until it convincingly gets all the way back above a key resistance line currently at $1220. If it does manage to move above that ceiling, however, the next one isn’t until the $1450 area, and the next big one past that point isn’t until $1800.
In other words, first things first.
Anything in between either of the falling wedge patterns plotted above, and we have to assume that the gold price trading range is still intact, regardless of the bigger-picture bullish scenario.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.