lunes, 26 de enero de 2015

lunes, enero 26, 2015
SNB Spikes Gold, Crushes Currency Traders - Will The ECB Do The Same?
             



Summary
  • The strength in gold this week may have been a one-off SNB-inspired event, with a decline to follow in the near term if the ECB calm markets.
  • The impulsive downside count detailed last week is now stretched to the limit, and is likely to be invalidated.
  • I expect a period of consolidation, but the ECB meeting and Greek election are catalysts for further volatility in the gold price.
  • Overall, I remain bearish on gold in the intermediate term but acknowledge the potential for a further short-term rise.
Wow, what a week it has been. We have had whipsaw galore in the equity markets, big moves in crude oil, currency pairs and gold, and a curveball thrown by a Central Bank that may have given us a glimpse of what lies ahead in our economic future.

Last week's forecast was for a further rise in the price of gold, to between $1240 & $1262 with an ideal target of $1251, before an interim top would be made and we head to test the November lows.

The forecast for further bullishness was correct, but overall wrong as gold exceeded the $1262 resistance level, briefly touching $1282 and finished the week at $1280, which regular readers will know is my line in the sand price for invalidation of the bearish downside impulsive count.

Last week's forecast also came with a warning for traders not to marry their positioning, as what would happen in the coming two weeks would likely decide gold's direction for the next couple of months. Obviously nobody could have predicted the action taken by the Swiss National Bank this week, but the volatility of markets as participants jostle for positioning ahead of the ECB meeting and Greek election was expected, albeit not to the extent seen in the last few days. So where does that leave us with respect to gold?

Volatility Fuels the Safety Trade

It would appear that volatility is back in the markets - great for nimble traders, but not so good for the more traditional buy and hold investor. Uncertainty often leads to changes in portfolio allocation and trading positions, and results in choppy up/down price movements on the charts as traders and investors struggle to work out market direction.

Before we get to the main event, if you are looking for a market that is exhibiting strain, look no further than the US benchmark index S&P 500. Since the start of the year, SPX has started the trading day in the green 8 times which suggests strength, but it has then gone on to close lower more often than not. The only way to have capitalised so far would be to buy the close and sell the open each day, whereas in a strong up-trending market the opposite is true. On Friday that micro trend changed, with futures substantially lower overnight and a positive cash close, but it is still hard to call the short-term trend with any confidence.

Another good example is crude oil (NYSEARCA:OIL). The general bearishness for crude has persisted, and the financial press remains awash with articles predicting doom and gloom for oil prices and the industry in general. Something that was not widely reported was the turnaround on (predictably) Tuesday, with crude bottoming at $44 and rising to $51 by the 15th, representing a 16% rise in just over 2 days. Price then dropped 10% over the next day and a half, but closed with a small weekly gain at $48.50. Volatile is perhaps too mild an adjective - these are extreme moves in very short time frames.

The point of including the above examples in an article focused on gold, is to highlight that in uncertain times the natural outcome is a move into safe haven assets. Traditionally that would be bonds (NYSEARCA:TLT), but gold (NYSEARCA:GLD) is often another beneficiary. Both asset classes made nice gains this week, and should the volatility continue you can expect further price increases. The question is whether or not the markets calm down in the coming days.

SNB Causes Panic on the Trading Floor

The big news this week was obviously the Swiss National Bank abandoning their peg to the Euro (NYSEARCA:FXE), seemingly on a whim, but doubtless after careful thought and deliberation. If nothing else you should admire how they managed to keep this under wraps - apparently nobody had any advance warning of the action they were about to take.

IMF Managing Director Christine Lagarde expressed surprise that she was not informed prior to the SNB action, but it is partly understandable that the SNB would want to keep their intentions hidden, as this would likely have led to pre-emptive action in the markets as traders reduced their exposure to the trade. When you think about it logically, excessive volatility could not have been avoided regardless of how the situation was handled, but you can imagine a sense of dread all round as they decoupled from the Euro and made their announcement.

The daily chart is just phenomenal:


(click to enlarge)

The peg was put in place back in 2011 after the steadily strengthening Franc (NYSEARCA:FXF) experienced a remarkable 31% rise against the Euro in the previous 12 months. At the time the SNB were worried about the effects on Swiss exporters as their products became increasingly expensive for Eurozone clients, and they wanted to stabilise the exchange rate to maintain trade flows.

It would appear that this concern has now passed, or rather it has been usurped by fresh worries regarding deflation in the Eurozone, a steadily weakening Euro, plus potential action about to be taken by the ECB next week.

European equity markets rallied as the implications were calculated, and they seem to be pricing in the potential for a massive ECB aid package. Rumours are circulating that Mario Draghi will announce a Trillion Euro quantitative easing deal when the ECB convenes on January 22nd. A deal such as this is likely to weaken the Euro further, meaning the Swiss would potentially have had to spend more to buy the Euros needed to keep the peg in place.

Faced with this prospect and worsening economic conditions in the Eurozone that have already led to declining sales of Swiss goods within Europe anyway, they have taken action that potentially improves their own situation. Once again they have the chance to become a safe haven for European money looking to avoid the effects of deflation, and now that they have lowered their interest rate to -0.75%, they get to charge for the privilege.

On the surface, the interest rate change appeases exporters now faced with the same problems from 2011, as it is designed to prohibit massive inflows into the Franc and stop it strengthening wildly, but it is certainly a cute move. Whether it works remains to be seen as the safe haven of choice at present is the US Dollar, but I would not be surprised to see the Franc strengthen in coming months.

The effects of this move are still being calculated, but as I write this Global Brokers in New Zealand and Alpari based in the UK have both shut down, and FXCM in the US require a $200M loan to shore up their operation. Many of the major banks lost huge sums on this trade - the trading floors must have been a sight to behold that day.

People were shocked that a change of this magnitude was made without warning, and are now considering whether this is a sign of things to come with Central Banks beginning to act independently to serve only their own interests. If this is the first blow in a 'currency war', you can expect gold to move substantially higher over the next year or two.

Predictably, the Euro weakened further and the US Dollar climbed higher. The Euro chart is now eerily reminiscent of how crude oil looked this summer just before it began to drop hard. The next support level is now 1.1192, followed by 1.0830:

(click to enlarge)

For the US Dollar (DXY) the next resistance level is 95.77 followed by 96.34, and as with the Euro chart above, I expect these levels to offer only minor resistance:


(click to enlarge)

Gold is often described as a hedge against inflation, but in this case it has acted as a hedge against an abrupt change in SNB policy and as a safe haven for investors unsure of their economic footing. Last week I wrote about a strengthening US Dollar putting pressure on the gold price, but over the last 2 weeks it is clear that gold has strengthened with the Dollar and has temporarily abandoned the relationship.

I am admittedly conflicted as to whether or not this trend will continue, given that Mario Draghi could easily pacify the equity markets next week, and fallout from the Swiss news will recede. The currency shock this week could well have been a one-off event, and gold would then go back to its normal price habits. However, there is still one hurdle to jump in the form of the Greek elections.

Was the SNB Curveball a Dry-Run for the Potential Greek Exit?

In all the fun and games this week, there has been little talk about the Greek elections in the mainstream financial media, but make no mistake this is an important issue for the future of the Eurozone.

If Syriza gains power on January 25th and then decides to leave the European Union, especially if it quickly results in improved economic conditions for Greece as a whole, it will set a template for other Eurozone countries suffering under the weight of their own debt burden to follow suit.

On the other hand, if a deal is worked out that allows the Greek government to reduce their debt burden and remain part of the European Union, other countries will doubtless be wondering why debts cannot be restructured for them too.

In recent months we have seen growing tensions between EU members, and anti-austerity politics have been the hot topic that has spread across the Eurozone. We now have the Podemos party in Spain, modelled directly on the promised policies of Syriza, and rapidly gaining ground in Spanish polls.

This puts Mario Draghi in a tricky situation. Put simply, he cannot allow Greece to leave the European Union, but any deal worked out for them alone is going to be unpopular with the other European nations and foster doubts about the integrity of the current EU system. This is especially true of Germany who have been vocal in their objection to any reduction in Greek debt, and do not want the ECB to use a QE package to buy the bonds of certain Eurozone members, fearing that an eventual default would leave them to shoulder a large portion of the deficit.

Most likely a deal will be worked out that allows Greece to extend repayments, and reports from Germany this weekend are hinting that the ECB will propose a solution whereby the individual Central Banks of each Eurozone country are allowed to buy up to 25% of their own government debt. Ultimately any QE stimulus is a move that devalues the Euro further, and will no doubt result in further capital flows away from the Eurozone and into safe haven currencies and assets.

Most certainly the US Dollar and US Treasuries will be the main recipients, but given the action this week it would be foolish not to acknowledge the potential for further gains in gold. However, if a deal can be struck that satisfies all members, returns confidence to the major equity markets, and lowers expectation of EU member defaults, gold will more than likely decline as the safety play would be effectively over.

Data Points

As usual we will quickly run through some of the precious metals data points that can often help with positioning. For those unfamiliar with these concepts an explanation can be found here.

GOFO remains positive, showing an adequate amount of physical supply on the market. With the sharp move higher this week, you would be forgiven for thinking that there may have been a temporary shortage of physical gold spurring buyers to come in, but in fact this is not the case. The implication is that the buying we have seen this week was speculative, rather than a tactical move by a major holder to increase their physical reserves.

The COT figures this week come with a warning that they cannot be wholly relied upon. The CFTC compile the data as at each Tuesday and release the report on Friday, but with the moves we have seen from Thursday this week, you can well imagine that positions may have changed dramatically.

COMMERCIAL LARGE SPEC SMALL SPEC 
      
LONGSHORTLONGSHORTLONGSHORT
129,436267,112192,95962,73338,98431,534
      
CHANGECHANGECHANGECHANGECHANGECHANGE
-991+14,013+5,254-2,794+3994-2,962
      

For the third week running, we see that the commercial category increased their net short position, with the speculator categories taking most of the other side of that trade.

Overall, you can see that the Commercials believe lower lows will be seen for gold. If this was not the case they would have gradually been increasing their net long positions prior to and since the November 2014 lows. If we have indeed seen the lows in gold for some time ahead, the next report should see a huge change in positioning.

The Gold Miners were interesting this week. As we hit my $1243 target and started to consolidate on Wednesday, the Gold miners made their highs more or less at the levels given on my charts last week - Majors (NYSEARCA:GDX) had a target of 21.73 and topped out at 21.88; Juniors (NYSEARCA:GDXJ) had a target of 29.43 and topped at 29.66.

When the news came out on Thursday and gold rallied strongly up to $1267, the miners failed to make new highs of their own, which was expected as they tend to lead gold and often make a lower high just before gold tops out and begins a wave down. Only on Friday when gold rallied to $1282 did we see a new high in the mining charts, but only in the majors as GDX broke through to finish at 22.19; GDXJ came close but could not break through, rising up to touch that 29.43 resistance level and move slightly lower.

The charts are below, and on the smaller time frames you can see technical negative divergences to accompany the divergence with the gold price. With the bullish gold performance last week, it should be acknowledged that these divergences may not amount to much this week.

(click to enlarge)
(click to enlarge)

For GDX, a move above 22.50 that then consolidates above that level would be a good indication of further bullishness to come. For GDXJ that level is 31.66. If we do break those levels, I would be looking to buy but would not go all in immediately chasing price, as after the strong move up in gold a consolidation period would not be unusual.

Looking at other bear market rallies in GDX since 2011, the average gain has been around 40% in around 3 months. We are currently 37% higher than our November lows, and 11 weeks into the rise. History would imply that bulls need to be careful over the next few weeks.

The gold chart shows undeniable strength, and we are now right at the point where the bearish downside count could be invalidated. My forecast last week said that if we were to sustain trade above $1262, with follow through above the $1280 level, I would be looking for targets at least in the mid 1300's for gold. Well we have sustained trade above $1262 and have now broken $1280.

The chart below shows targets for this current rise:

(click to enlarge)

The next resistance level above is $1297; at the top of the range we have $1340, and declining trendine resistance currently stands at $1328. I would not expect us to immediately exceed that level, and expect some kind of consolidation to follow this spike up in gold.

The form of the consolidation will dictate the chances for a further rise higher than the above upper targets. A corrective decline would imply we are going higher, but an impulsive drop should see us head to test the November 2014 lows.

Ultimately, despite the wholesale bullishness I am now seeing in the media, I still consider this to be a bear market rally, and would not even consider a long-term bottom in place until we broke higher than 1430.

Everybody wants to catch the low in gold, but it is far more important to make sure the low is in place before you put your capital in harm's way. When asked how he had amassed his fortune, Baron Nathan Rothschild said the following:

"I never buy at the bottom, and I always sell too soon..."

I wish you all good luck for the week ahead!

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