Fac­tors tug against each other but ris­ing US in­ter­est rates pro­vide a head­wind

Financial Mail - Investors Monthly - - Contents - GARTH MACKEN­ZIE www.trader­

The gold price has spent the past five years mak­ing a large round­ing bot­tom pat­tern. The gold bear mar­ket bot­tomed out in 2015 at US$1,050/oz. Since then the price has been grad­u­ally climb­ing, with suc­ces­sively higher lows.

There is an area of stiff over­head re­sis­tance at $1,360/oz that has proven dif­fi­cult to break through in the past two years. But the pat­tern of suc­ces­sive higher lows in­di­cates that buy­ers are gen­er­ally the stronger force and that the prob­a­bil­ity of an even­tual break to above the $1,360/oz re­sis­tance level is quite high.

A res­o­lu­tion one way or the other is likely in the next few months. The price is nar­row­ing into the apex be­tween the ris­ing up­trend sup­port at $1,300/oz and the over­head re­sis­tance at $1,360/oz. The higher prob­a­bil­ity out­come is for a break to the up­side to oc­cur. But, fun­da­men­tally, what are the pos­si­ble head­winds and tail­winds for the gold price that could move it in one di­rec­tion or the other?

A weak­en­ing US dol­lar should serve as a tail­wind for the price of the metal. As gold is priced in dol­lars, a weaker US dol­lar nat­u­rally helps to push the dol­lar price of the metal higher. Ris­ing in­fla­tion in the US would also serve as a tail­wind, as would ris­ing geopo­lit­i­cal ten­sions.

Re­cently when the US was threat­en­ing mil­i­tary ac­tion in Syria, the gold price re­sponded with a move to the up­side. Any fur­ther such ten­sions could push the gold price higher.

One ma­jor head­wind for the value of gold, how­ever, is ris­ing US in­ter­est rates. Keep in mind that gold is an as­set that yields noth­ing in terms of in­come or div­i­dends. It is purely a store of value that gets locked up in vaults un­der the ground.

In­vestors in gold gain a ben­e­fit only if the traded price of the metal in­creases in value. This im­plies that there is an op­por­tu­nity cost of hold­ing gold equiv­a­lent to the risk-free in­ter­est rate. When in­ter­est rates are ex­tremely low or near zero, as has been the case in re­cent years, that op­por­tu­nity cost is low. How­ever, in an en­vi­ron­ment where in­ter­est rates are ris­ing, the op­por­tu­nity cost of hold­ing gold in­creases as a re­sult of the for­gone in­ter­est that could have been earned had the money rather been in­vested in an in­ter­est­bear­ing in­vest­ment. Ris­ing in­ter­est rates make gold an unattrac­tive as­set class for that rea­son.

All of th­ese fac­tors are tug­ging against each other at present and have meant that the trad­ing ac­tion in 2018 so far has been rather choppy and range-bound. But a res­o­lu­tion is likely soon.

A break above $1,360/oz would be a bullish tech­ni­cal de­vel­op­ment that should open fur­ther po­ten­tial up­side in the price. A medium-term tech­ni­cal tar­get of $1,500/oz is fea­si­ble if a sus­tained break above $1,360 oc­curs.

In the event of price weak­ness in the im­me­di­ate fu­ture, the first sig­nif­i­cant level of sup­port is at $1,300/oz. That is where the up­trend from all the re­cent lows come into play, and is also where the 200-day mov­ing av­er­age sits.

A pull­back towards $1,300/oz would present a buy­ing op­por­tu­nity if the price is able to hold on to the sup­port at $1,300/oz and re­verse up off that level.

If the price were to fall con­vinc­ingly be­low the $1,300/oz level then the bullish bias will need to be re­assessed.

Time will soon tell which way the price breaks, and which of the fun­da­men­tal forces wins out. A wild card would be es­ca­lat­ing geopo­lit­i­cal ten­sions that could pro­vide a sud­den cat­a­lyst for a move to the up­side.


Pic­ture: 123RF — KTSDESIGN

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