Gold has always been a financial instrument rather than a commodity. Its price was more dependant on the current financial conditions and fear-greed barometer in the global trading, rather than supply-demand relations. The vast majority of central banks, as well as huge financial institutions, use gold as the hedging asset, backing up their monetary reserves. Most of the experienced traders remember ugly 2008 when the financial crisis hammered the global economy with an awful lot of bankruptcies around the world. It all started with Lehman Brothers collapse, the institutional investment bank with a hundred-year history. Gold prices soared to unprecedented levels in the history as investors were rushing to purchase any solid asset on fears of a global financial crash. Cash flows were uncertain those days, equities were losing their value extremely rapidly, the confidence in any debt securities including corporate and government bonds was diminishing, other commodities could not be considered as saving instruments due to the demand and consumption concerns. There was no reasonable alternative to gold. We see first signs of similar processes happening in the financial markets nowadays and we suggest that the current price of gold is extremely underestimated with the abnormal potential to shoot out as early as at the beginning of the upcoming year. And here is why.
Monetary policy divergence.
US Federal Reserve chairman Jerome Powell is under a threat of firing, according to several sources, despite the lack of legal mechanisms to implement such an impulsive decision. US President Donald Trump had criticised Powell several times before, and now thousands of private investors joined him, pressuring US monetary policymakers. The thing is that Federal Open Market Committee hiked the interest rates for 25 basis points, the fourth time this year and fifth quarter in a row, without any solid justification, according to many Wall Street traders and economists. Moreover, the Fed did not cancel its intentions for three more hikes next year, inserting once the single word “some” to the commonly used phrase “gradual tightening”. In addition, the quantitative tightening programme of unwinding the Fed’s balance sheet by the total monthly volume of 50 billion dollars is pencilled to proceed the pressure on financial conditions. The regulator did not take in count slowing inflationary pressure, which missed the target of 2% on annual basis, as latest CPI and PPI reports showed. Powell did not care about the slowing economic growth in the US with Gross Domestic Report revised down, consumer spending, average earnings and retail sales fell, durable goods orders and manufacturing production decreased. Negative double-gap, one of the toughest financial concerns of the leading world’s economy, the Federal Budget deficit and Trade Balance surplus, was not considered as a reason to stop the tightening cycle as well. US Treasury already expressed concerns about the fact that it's getting harder to cover that hole, as the borrowing costs rise amid Fed’s hikes. As a result, US stock indices plunged, expanding the negative yearly result, the first year in a decade.
US President Donald Trump keeps surprising political observers around the globe with his unexpected decisions. Last weeks’ steps show only the upper part of the iceberg. Trump decided to withdraw US troops from Syria and Afganistan without any consultations with allies and military officials. As a result - US Defence Secretary James Mattis resigned, enlarging the long list of top officials and advisors running from the White House as far and as fast as possible. Before going into 16-days Christmas vacation, the President refused to sign the Federal Budget bill, leaving thousands of federal employees worried about their paychecks. That’s the second government shutdown during his presidency and the reason is quite stupid, according to many analysts - the lack of funds for the wall on the border with Mexico. Are you serious? House of Representatives and Senate were shocked as government chaos is predicted instead of holidays. Add here several ongoing investigations against Trump’s businesses and ex-employees, and you will get the overall picture of the political turbulence in the United States. France with local demonstrations, Britain with the Brexit saga and government non-confidence motion, Germany with refugees issues, Italy with populists budget - isn’t that list enough to assume the global economy in trouble?
Global recession worries.
The trade war between US and China isn’t over yet, despite optimistic statements by both sides after the G20 summit in Argentina in early December. A potential escalation has been just postponed with words instead of actions. Moreover, actions confirm the opposite as Chinese tech giant Huawei’s CFO has been arrested which is an unprecedented geopolitical pressure. As a result - Chinese mirror sanctions, new tariffs threats, trade war escalation. We suggest that this story would have a dramatic development as early as in January 2019, right after the Christmas holidays as the Chinese government won’t let it go without any consequence. International Monetary Fund had cut the global economic outlook, emerging markets are close to collapse. Asian equities plunged right after the US market crash and the panic reaction is not over yet. Bank Of Japan failed to calm down investors last week, despite promises of further supportive measures for the export-oriented economy. Chinese economic growth has been boosted by abnormal liquidity injections from the government, lifting the debt to GDP ratio to an incredible 320%. Argentine and Turkish turmoils were just first birds of an upcoming panic sell-off in emerging markets. Losses were compatible to 40 and 50% respectively. If the chain reaction would have spread to other parts of the world, rivers of blood would flow in the financial markets. Guess where will the gold price be headed in this case?
Below is a squeezed long-term weekly chart of gold prices. We’ve shown the impact of the latest financial crisis on gold price in November 2008 for those traders who did not trade in the financial markets at that time. Look what it did to gold just to realize a potential scale of things which had only started, in our opinion. An interesting observation is that gold’s surge started two or three months after stock indices begun to slip. The explanation could be related to optimists who still hoped that its’ just a technical retracement and things would come back to normal shortly...
Technically speaking, the current price levels are placed between 61.8% Fibonacci retracement ($1167.57) of that massive uptrend and 50% level (1304.97). The last figure represents an extremely crucial technical resistance, dividing the uptrend continuation from further retracement. Once it will be breached clearly by the weekly close prices, we’d see another range in play - up to $1442.36, which looks so far from current levels of $1255 approximately. The nearest resistance, which should work as an intermediate confirmation of the previous assumptions, is currently placed at $1265.44. That’s the simple moving average with 144-weeks period (almost two-years average curve). First bullish attempts to test that resistance curve were noticed last week and we suggest that’s just a matter of time to break it. Another important line represents the ascending channel of the local uptrend in the period between December 2015 and January 2017. That trendline is rather placed at almost the same prices range. The bullish scenario assumes that once the following sequence is breached - $1265-1300/05 - the road to $1350 and $1400 in extension will be opened for the bulls. The only question remains about the speed of such a price action though, but that depends on fundamentals’ impact. Summarizing all written above, buying a long-term call option for gold would not be such a terrible idea, huh?