- The dollar steps on the rally with a bullish reversal last week.
- Issues around the world warn not to get too bearish.
- Technical levels to watch in gold on the up and the downside.
- Gold mining stocks are waiting for gold to make a move – GDX is likely to outperform gold if the price breaks higher.
Gold is a safe haven asset that market participants tend to flock to during periods of fear, uncertainty, and inflation. The yellow metal is both a commodity and a financial asset, making it unique. Along with its many industrial and ornamental uses, gold serves as an asset for countries around the world that hold the metal as part of their foreign currency reserves. Not only do central banks, governments, and monetary authorities hold gold, but they have been net buyers of the precious metal over the past few years. China and Russia are both absorbing their domestic production and purchasing the metal in the international market to build reserves.
Gold has a long history as a currency or means of exchange. Long before the dollar, euro, yen, pound, Swiss franc, yuan, or any other legal tender in circulation today existed, the yellow metal served as a tool for the exchange of goods.
Gold mining companies explore for and extract the metal from the crust of the earth. The VanEck Vectors Gold Miners ETF (GDX) holds shares in many of the world’s leading gold mining companies and tends to outperform the price action in the gold market during bull market periods.
A move to over $1,300 fails
In the wake of the escalation of the trade dispute between the US and China that caused new tariffs from the US on May 10 and retaliation from China on May 13, volatility rose in markets, and gold made an attempt to climb through the $1,300 level.
As the daily chart highlights, June gold futures put in a bullish reversal trading pattern on May 13 and moved to a marginal new high on May 14 at $1,304.20 before it turned lower. The high for gold in the June futures contract for 2019 was at $1,356, and the low was at $1,267.30 on May 2. On Wednesday, May 22, the yellow metal was trading at $1,275, a lot closer to the low for this year than the high.
Technical metrics turned bearish after the price failure at above the $1,300 level with both price momentum and relative strength metrics moving from slightly overbought toward oversold territory. Daily historical volatility has risen from 6.27% at the start of this month to 8.44%. The total number of open long and short positions in COMEX gold futures rose from 433,874 contracts on May 1 to 524,355 contracts on May 15. It’s was at 508,643 on May 21 and it’s likely that the open interest metric will decline as disappointed longs throw in the towel on their risk positions as the price of gold moved back below $1,280 per ounce.
The dollar steps on the rally with a bullish reversal last week
One of the leading reasons why gold came down was last week’s action in the dollar, which tends to have an inverse price relationship with the yellow metal. The dollar index hit a new high for 2019 in April at 98.085. After a brief and shallow correction that took the index to a low at 96.81 last week, the dollar put in a bullish formation on the weekly chart.
The dollar index fell to 96.81 on May 13, the same day gold moved over the $1,300 level. However, the dollar index put in a bullish reversal pattern on the weekly chart as of last Friday, which could lead to higher highs and a challenge of the April peak at just over the 98 level. The reversal in the US currency and potential for a stronger dollar weighed on the price of gold and sent it back toward its low for this year.
Issues around the world warn not to get too bearish
The trade dispute between the US and China is ongoing and is likely one of the reasons for the rise in the dollar. China has the world’s second-leading GDP, and new tariffs and retaliatory moves are weighing on its economy. To stimulate conditions in China, the government is slashing interest rates and devaluing its currency, the yuan. A weaker yuan is a supportive factor for the dollar. Presidents Trump and Xi will meet at the G20 meeting in Japan at the end of June to discuss the current status of trade negotiations. The next significant news on the issues that divide the two nations is likely to come from that meeting.
Meanwhile, the situation in the Middle East is tense with increased US sanctions on Iran and a handful of provocations from the Iranians against oil tankers in the region and a Saudi pipeline near Riyadh, Saudi Arabia, last week. Rising tensions in the area is keeping the bid under the crude oil market and could cause a flight to gold if the situation deteriorates over the coming days and weeks. The OPEC meeting in late June could provide some surprises that may impact markets given the situation with Iran and the ongoing proxy war between the Saudis and the theocracy in Teheran.
Recently, North Korea has begun testing missiles and rockets after the summit between President Trump and Chairman Kim Jong Un did not produce progress and both sides left after the North Koreans refused to take steps toward denuclearization. The temperature on the Korean Peninsula could rise if the hermit nation continues to provoke the US with missile tests in the region.
The European economy remains sluggish, and it’s likely Prime Minister May’s last day is on the horizon. The PM will bring another proposal for Brexit, the third, before the House of Commons in June. While it’s likely that it will not pass muster with the MPs, this time, the odds favor a resignation from Prime Minister May which will create uncertainty about the leadership of the UK with the next deadline for a Brexit deal looming at the end of October and the potential for another referendum on the horizon.
In the US, political divisiveness seems to reach a new level each day. With the 2020 presidential contest on the horizon, and the desire to impeach President Trump rising among the members of the opposition party in the Congress, uncertainty in the US could cause a flight to safety in markets in the months ahead.
With all of these issues and more facing the world, it may be too early to get overly negative about the prospects