Oct. 16, 2014 6:02 AM ET
Summary
- A key reversal on daily charts.
- Did a currency swap ignite gold?
- Platinum, silver and other commodities are still weak.
- Deflation and gold.
- Gold's outlook from here.
It is time for me to eat some crow, golden crow that is. Gold settled on the active month COMEX December futures contract on Wednesday, October 15 at $1244.80. The closing price signaled a key reversal on the daily charts.
(click to enlarge)
Gold traded below the previous day's low and closed above the October 14 highs on daily charts.
Gold actually traded up to a high of $1250.30 during Wednesday's session. Now, gold is looking positive on a technical basis once again. It did make its way all the way down to $1183.30 on October 6 and held. I noted in my last article "Gold and Precious Metals- Caught in the eye of a storm" that lower prices has attracted physical buying in Asia, lifting premiums in India and China. Tuesday, a confluence of events - a tanking stock market, roaring bond market and low interest rates and a downside correction in the US dollar caused the yellow metal to roar.
Current global financial weakness, political turmoil in terms of fighting terrorist forces, health-related woes with a spreading Ebola virus that has moved from West Africa to Europe and US shores, has made it apparent that the Federal Reserve will not be able to raise interest rates any time soon. Low interest rates are what fueled a rally in commodity and gold prices. This time, things are a little different; this time the risk has become deflation - a condition where all prices go lower. However, gold is not moving lower with other commodity prices. Unlike silver, platinum, oil, grains, iron ore and many other commodities, gold has held its long-term support and bounced. As the chart illustrates, on July 29 gold put in its last key reversal to the downside. It closed at $1300.50 on that day and eventually moved down before finding the recent bottom at just above $1,180. July 29 and October 15 both saw huge volume in gold futures contracts -- on July 29 the price eventually followed through after the technical event.
Did a currency swap ignite gold?
Over this past weekend, a meeting between Russian and Chinese leaders in Moscow resulted in a number of agreements. China has stepped as a willing business partner for Mr. Putin as the US and Western European nations have imposed sanctions on the Russian leader over Ukraine.
One of the most important agreements concluded over the weekend could have been a $150 billion yuan swap arrangement for local currency, namely rubles.
This is significant because it makes US dollars and euros (as well as other traded currencies) unnecessary as a means of exchange for transactions between Russia, the commodity-producing nation, and China, the ultimate commodity consumer. In a weakening global economy where the major currencies of the world are often subject to criticism due to Central Bank policies of easing, artificially low interest rates and money printing, the swap arrangement is a further blow to the efficacy of so-called "reserve" currencies. This sidestepping of the largest and most widely traded and convertible currencies could just be a shot in the arm and renew faith in the yellow metal. After all, gold has been a means of exchange for thousands of years. China and Russia are also two of the largest gold producers in the world. They have been building their own reserves through domestic production over recent years.
Platinum and silver remain weak
While oil prices continue to slide, taking equity prices along for the ride, many commodity prices have taken it on the chin. Industrial precious metals, silver and platinum, broke down, falling below long-term support levels over the past month. As gold attracted safe-haven buying on Wednesday, both silver and platinum experienced anemic rallies, with both metals remaining well below broken support levels. Based on long-term historical median trading relationships, both platinum and silver are either cheap relative to gold, or gold is expensive relative to its industrial and precious cousins. The gold rally on Wednesday only served to widen those differentials.
Deflation
There is a lot of talk about deflation out there. Stocks and commodity prices are generally tanking. The price of oil has dropped by 20% in a few months. Economic weakness in China and virtually no growth in Europe is causing a contagion that weighs heavily on the US economy, which was at the early stages of a comeback. Now we are witnessing huge volatility in markets. Aside from economic concerns, there are other threats. The US government is warning of a prolonged campaign to save the world from ISIS terrorists threatening countries in the Middle East and around the world. The spread of Ebola outside of West Africa has governments and citizens worried about the potential for a devastating pandemic. This is almost a perfect storm of bad news, and the result could be a severe bout of deflationary pressures. With deflation, the price of everything goes down, but chances are the price of gold can outperform many other assets. Additionally, in the current environment of across-the-board selling, the odds of de-risking grows. There are not big speculative long positions in gold today, which means that few longs will have to sell gold to pay margin calls. Deflation is not going to be good for the price of any asset, but it might be slightly less bad for gold. That is why gold attracted buying on Wednesday. After all, gold is and always has been the ultimate safe haven asset.
Gold's outlook for the coming days...
A key reversal that took gold over an important resistance level on Wednesday is bullish for the yellow metal. As I write, gold is straddling that level at 1241.70. I have not increased gold holdings in my portfolio just yet or recommended closing short positions, as I want to see the yellow metal close above $1250 before I do.
The current panic in oil and equity markets concerns me that gold could be heading for a giant head fake here. We saw that happen in 2008 when the price dropped from over $1000 per ounce in March to under $800 in October. However, given the current state of the world and markets, chances are I will be buying gold once again in short order. Price momentum in the coming days will tell me what to do. Whatever happens, based on Wednesday's action, I am prepared to eat some crow on my recent opinions.
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