Key Points:
- Gold breaches bearish weekly trend line.
- $1372.60 December 2015 high looms.
- Medium outlook remains bullish.
Gold futures have continued their trend of closing higher, with the precious metal currently trading around the $1360.84 an ounce mark, as risk adverse investors seek out the haven asset. Given that Gold is now closing in on the December 2015 high at $1372.60 many are now questioning just how far the haven asset can advance and what’s driving the current demand.
The reality is that much of what is fuelling demand for the metal over the past few months is the increasing risk of economic uncertainty within the US in the near future. The past few weeks has largely seen the Federal Reserve’s rhetoric on rate hikes run out of steam as many are now waking up to the fact that there is likely to be no further hikes to the Federal Funds Rate in 2016. In extension, we could actually see further easing if the larger global economy falters which looks highly likely given that NIESR currently puts the risk of a UK recession at 50%.
Subsequently, given both the historic connection between Gold’s price and the underlying US money supply it seems almost intuitive that the metal would start to increase in price at some stage. The introduction of QE was always going to lead to higher Gold prices in the long term so it is no surprise that we are now seeing the start of a bullish medium term trend for the metal.
From a fundamental perspective, although inflationary pressures are still largely absent (despite huge M2 expansion over the past few years) the time has run out for the Fed’s prevarications over rate hikes. The overuse of the central banks expectations channel has reduced its effectiveness and many are now questioning just where the US economy is heading in the medium term. Subsequently, this week’s Non-Farm Payroll figure is going to need to provide a relatively strong result to fight off the current bevy of Gold bulls.
In addition, from a technical perspective, the last 24 hours has seen Gold challenge and breach the bear market’s weekly trend line. This is a strongly bullish signal and likely predisposes the metal for continuing rallies in the near term. Subsequently, an eventual challenge to the December high at $1372.60 is highly probable over the next few weeks. However, in the short term, the metal is likely to moderate given that the RSI and Stochastic Oscillator’s have entered overbought territory on the daily time frame.
Figure - Gold Daily Time Frame
Ultimately, there are some very strong fundamental and technical reasons to suggest that the bearish weekly trend for Gold may have just come to a sharp end. This is especially the case with both the breach of the bearish weekly trend and the looming December 2015 high. I suspect that any subsequent breach of that level is likely to bring about a sharp rally and renewed interest in both physical and paper forms as a haven from uncertainty and risk.