THE ONLY THING I´M TRADING IN THIS MARKET / SEEKING ALPHA

The Only Thing I'm Trading In This Market


by: Michael Grogan

Summary

 

- With the US dollar weakening, gold has fallen back into its role as a safe haven.

- Import duties in India have failed to curb rising demand.

- Gold demand is likely to continue increasing in China to hedge against a weakening dollar and yuan.

- I am highly bullish on gold.
 

 

My bullish stance on gold stands in stark contrast to that of a year ago. The US dollar had been strengthening; growth had been picking up in certain European countries along with that of the USA being above 2%.

 

Moreover, Indian import duties had threatened to significantly reduce the demand for gold. In this context, I had envisaged that the price of gold would stay low and indeed it did so for a time.

 

However, we are now living in quite a different environment to that of a year ago. Along with a market downturn, growth in the United States could potentially be derailed by rising interest rates.

 

The Federal Reserve has already commented that a strong dollar could threaten economic growth, and the currency has been sliding since.

 

In this context, I am highly bullish on gold in this environment. While some could argue that the inverse relationship of gold-USD does not always hold, it is no doubt holding in this environment.

 

While the dollar is dropping against several major currencies, gold has been rising significantly:

 

 

4-hour chart

 

1-day chart

 

On the 4-hour chart, we see that not only has there been a consistently steady increase in price over the past month with moving average indicators in line, we also see that on the 1-day chart price is set to breach a resistance of 1180, a level not seen since October.

Should we see a breach of this level, then I would take this as a signal that a longer-term price increase in gold is on the cards. Moreover, we see that the directional movement indicators on the 1-day chart are strongly diverging, indicating a very strong trend that shows no signs of slowing on a long-term basis.

 

Moreover, a weakening dollar means that demand from India and China can be expected to increase.

 

Gold imports have been on the rise in India as gold shipments surged by 179 percent. While import duties were put in place for the purpose of curbing demand, this has not been the case and in fact unofficial trade of the metal has increased, as dealers continue to import so as to satisfy demand. I anticipate that this will continue as gold becomes a safe-haven play against the dollar.

 

Additionally, demand in China has increased by 3.7 percent from last year driven in much part by the weakening dollar. Foreign exchange reserves have also been shrinking to the lowest level in four years as the central bank sells dollars to curb a weakening yuan. Given that the dollar itself is now weakening, I expect that gold demand in China will increase as a form of reserve currency to shield against drops in both the dollar and the yuan.

 

To conclude, I am highly bullish on gold in the current environment and expect price to continue rising should current economic conditions continue.