Gold Nears Moment Of Truth: Will Physical Demand Come To The Rescue?
[ The Struggle Between East and West For Control of the Gold Price ]
The U.S. dollar index has been on a tear in recent months, climbing 8.75% since July 1. The greenback is gaining steam, amid expectations for Federal Reserve rate hikes in 2015, which will improve rate differentials versus other major currencies.
While the dollar outlook is bullish, that in turn, has been weighing on gold. The gold market is nearing a so-called "moment of truth." Will physical buyers step in to rescue the yellow metal near the $1,183-1,182 zone?
Take a look at Figure 1 below, which shows a weekly continuation chart of Comex gold futures. There were two previous occasions in which gold retreated to this price zone —and both times active and aggressive physical buying helped prop up the market. The first marked "A" occurred in June 2013 and the second marked "B" was seen in January 2014. On both occasions, long-term gold investors were attracted to the lower price zone and used the dip as a buying opportunity.
Will that happen again now? The jury is still out. Keep an eye an intermarket dynamics. It could be key.
The U.S. stock market is rebounding higher. But, will the recovery prove to be a dead cat bounce? There are many who warn that the U.S. stock market rally in recent months was based on growth and inflation expectations that have not been met, and that the equity market is vulnerable to a more substantial pullback or correction on the downside. Sure, the labor market is improving. But, the bond market —the financial market's inflation watchdog —isn't showing any signs of concern about growth inspired inflation. The 10-year Treasury yield has slipped lower from 3.03% to start 2014 to its recent 2.45% reading.
Besides its October. Watch to see if U.S. equities are able to continue to rebound or falter in the days ahead. October gets a bad rap when it comes to the stock market and there is good reason for that. Historically, October has some of the ugliest memories for stock market investors. It turns out when you look at the numbers, September scores high as a pretty dangerous month as well.
Here are a look at the Five Worst Days (largest single day percentage drops in history of the Dow Jones Industrial Average), according to djaverages.com
FIVE WORST DAYS
9/29/2008 -6.98%
10/15/2008 -7.87%
9/17/2001 -7.13%
12/1/2008 -7.7%
10/9/2008 -7.33%
This is just a small sampling and the month of October throughout history is littered with crashes, pullbacks and market stumbles, including of course October 1929, October 1932, October 1937, October 1987, October 1989, and October 1997.
In the early 20th century there actually was a rationale behind the month of October’s poor U.S. stock market performance. Looking back, the reason was at that time, the U.S. economy was dominated by agriculture. Farmers often had to borrow money in order to finish the fall harvest, which pulled money out of the financial system and left the market without liquidity needed to drive stock prices higher.
Today, of course, there is no lack of liquidity thanks to the U.S. Federal Reserve.
But, the liquidity-fueled stock bull run will need to readjust if the U.S. economy fails to deliver the growth and inflation expectations that the market has already priced in.
There are speculators, hedge funds and big money players who have been riding the U.S. stock bull higher in recent years. These are trend following players simply riding the trend and looking to book their profits along the way. Once the trend turns, they have no loyalty and will be out in a flash looking for the next trend to ride across the global marketplace.
If the current U.S. bull market in stocks begins to turn into a bear, there is a traditional cycle which sees investors shift from paper assets (stocks, bonds) into hard assets (commodities, real estate).
After all, if a paper investment goes bust, it always feels good to have something you can hold in your hand that has value.
There are many reasons that investors buy gold, as a portfolio diversifier, as an inflation hedge, as a currency hedge and as wealth preservation tool. Time is running out for the current U.S. bull market in stocks, gold continues to offer investors the peace of mind of a hard asset that you can hold.
The gold market is approaching a key line in the sand around the $1,180 level. There will be volatility around this level. Expect it. The bulls and bears both know this is a major price zone. Physical buyers, however, could choose to wait in the wings a bit on this retreat. Everybody wants to get a better price. Physical buyers could hold back to see if there will be a better "sale" price on gold ahead in the days or weeks ahead.
A sustained and strong downside breakout under $1,180 would trigger a bearish technical triangle pattern, seen on the weekly chart below. There will be fresh physical buying in the gold market ahead, but for now, it is not clear if buyers will step in now or wait for better levels.
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