Gold prices have consolidated this week, originally pulling back before the very dovish projections from the Fed put some wind under the sails of precious metal prices.

In USD, gold is currently trading at $1259 per ounce, essentially unchanged for the week, whilst silver is sitting at $16 per ounce, up nearly 3% for the week. Prices in Australian dollars have corrected, owing to the quite extraordinary rally in the local currency, which has pushed above 76 cents vs. the US dollar.

AUD gold and silver are now trading just below $1650 and $21 per ounce respectively, a pullback that is all currency related, rather than due to any actual precious metal price weakness.

Fed ‘Credibility’ Puts RBA in an Ugly Place

It’s safe to say the Fed surprised markets this week, with a level of dovishness re the outlook for monetary policy that was well below market expectations. For a measure of that, consider the price action in GDX (an ETF that is made up of gold stocks), which rose from a low of $18.86 on Wednesday to $21.42 today, a rise of over 13% at one point, though it has since eased back somewhat.

I don’t think many were expecting a rate hike, but the way the Fed says they see the economy, things are looking OK, so why the tilt to the easing side of the monetary policy table?

It’s a question that has many confused, including Steve Liesman, who asked Chair Janet Yellen the following question in the aftermath of the Fed’s monetary policy announcements.

Liesman: _“_Madam Chair, as you know, inflation has gone up the last two months. We had another strong jobs report. The tracking forecasts for GDP have returned to two percent. And yet the Fed stands pat while it's in a process of what it said at launch in December was a process of normalization.

So I have two questions about this. Does the Fed have a credibility problem in the sense that it says it will do one thing under certain conditions, but doesn't end up doing it? And then, frankly, if the current conditions are not sufficient for the Fed to raise rates, well, what would those conditions ever look like?"

It was a great question because, as I said above, according to the Fed’s own models, the economy is indeed doing OK. Many precious metal bulls (myself included) don’t agree with those models, and see weakness in the economy and stress in financial markets everywhere, but the reality is hard money advocates aren’t on the board of the Federal Reserve. So the question that Liesman asked was highly appropriate. Yellen’s answer in full can be found here.

We will leave it to readers to decide whether or not Yellen, and the Fed as a whole, has a credibility problem.

As many ABC Bullion market update readers will be aware, we often contribute to online investment newsletter service Livewire. This morning we read a great take on the Fed decision this week, and the implications for the RBA, written by Angus Coote from Jamieson Coote Bonds.

The report discussed the fact that the Fed has downgraded expectations of where rates will be at the end of 2016 and 2017, noting that the; “the dot-plot medians were adjusted downward quite aggressively, by 50bp in 2016 to 0.875%, by 50bp in 2017 to 1.875%, by 87bp in 2018 to 2.375% and 50bp in the long-run to 3.00%.”

Coote went on to note that; “This is the first time in decades that the FOMC have focused on global growth concerns and how they tie in with the US economy. This is aimed squarely at the effects of a strong USD. They want and need it lower. The lowering of the dot-plot is the Fed’s way of joining the global currency war - albeit subtly. Today's DOVISH Fed assessment adds pressure to USD positioning. We have long argued that a reversal of USD appreciation will be required to rebalance global markets. This puts the RBA in a shocking position of out of cycle rate hikes and stronger AUD currency both delivering a material tightening of financial conditions. Rate cuts will not be passed through in full by Aussie banks hungry for Net Interest Income stability.”

To me, the biggest take out from the report was the fact that core inflation expectations remain unchanged. You’d think they’d have lowered forecasts for inflation too based on the fact they are more cautious about the growth outlook.

You can read the whole report here.

Technical Look at Gold

with John Feeney

We will take a look at a few charts today as everyone seems to be getting quite bullish stocks again. For reasons we’ll explain, we think that could be a big mistake.

But let’s look at gold first. We warned of an expected pullback in the gold price last week, as even the most undervalued assets on the planet can be short-term overbought at times, and due a correction.

Two main reasons for this assumption was the fact that the charts had multiple overbought indicators, and secondly there had been a massive build up in commercial short positions into this rally. Commercials are usually correct with short-term moves, so when the “smart money” starts expecting a pullback, it pays to take notice. Fed dovishness notwithstanding, there could still be a larger pullback short-term for US gold, which would provide another excellent buying opportunity.

The trouble is, the vast majority of our clients at ABC Bullion are Australian dollar gold investors (as are John and I), and with the AUD above 76.4 US cents this morning, a correction in the AUD could upset those waiting for lower gold prices.

We think that’s highly possible too, though recent comments from the RBA almost suggest they’ve given up fighting the global currency war, though we think they’ll be highly worried about the latest rally in the local currency.

If we take a look at the most relevant chart for Australian gold investors (the weekly AUD GOLD chart below) we can see that the period where gold went above $1,700 an ounce was indeed short-term overbought on a technical basis.

Long term we think those being able to pick up an ounce of gold for just $1700 Australian dollars will be seen as a bargain, but short-term there is some resistance, with the pullback keeping the price in line with the overall pace of the uptrend since 2014.

Make no mistake, the overall trend is up for AUD gold, and it will be interesting to watch the Aussie dollar and the gold price itself interact over the next week or so. As such, we maintain our overall mantra of dollar-cost-averaging into any weakness in price. Particularly when we approach these oversold levels on gold itself, or if you see an overbought AUD.

A quick mention on silver, it is still below the $680 per kilo on spot price, which we think is great buying, but the Gold to Silver ratio is starting to drop and we are back below 80 this morning at around 78.9.

Again, we are at nosebleed levels for how cheap silver is relative to gold right now, testament to lower economic growth rates and deflationary concerns that we think are about played out.

On to the overall bullish sentiment on morning finance television towards stocks, it is quite amusing how just about everyone was bearish when the ASX200 was at 4800, but have turned bullish now that stocks are more expensive at 5160.

As TV analysts become bullish, we look to the ASX200 chart below, which is quite concerning. It managed to touch the 200 day moving average but the truth is, the ASX is in a downtrend, the MACD looks like it is about to signal a shift in momentum to the downside, and the Williams is signalling overbought.

It’s not a pretty picture and I’d expect the greater probability lying with a correction from here, though the Fed will obviously do all they can to keep the wheels of the global stock market party turning.

Overall, when we look at both gold and stocks side by side we think the most important point investors to take from these charts is the importance of balance and diversification. Going all in on one asset class is risky at the best of times, and we are not in the best of times in the global economy. We can understand why investors need to say long stocks to some degree (income if nothing else), but hard currency is crucial at times like these.

It would appear the tide seems to be turning on the sentiment towards gold in this regard, and it’s importance as part of a truly balanced portfolio. We even saw some stock market and funds management experts state that at a SMSF conference in Sydney yesterday, which was pleasing to see – as it proves that one need to be anti-stock to be pro-gold.

Gold Ghost Town

Before finishing this week’s report we thought we’d share something we came across reading an update from Port Philip Publishing (who we read regularly), titled “The Gold Non-Rush”.

The editor of that report stated that earlier this week, he’d spent “two-and-a-half hours in a bullion dealer’s, trying to make a transaction.” There is clearly no gold fever taking place in that particular office, as he said that in “the entire time we were there, one other person came in. Five years ago, at the same dealer’s, there was a queue out the door. The queues were so bad that they took to installing a deli counter ticketing system. Today the ticket machine was empty and the counter on the wall was turned off. I doubt if they’ve filled the ticket machine in months. Our conclusion: everyone hates gold.”

Interesting insight.

At ABC Bullion we’ve seen a huge increase in buying this year (though things have slowed down since the frenetic pace of early February when the ASX was plunging), but the editor at Port Phillip publishing makes a great point.

When gold truly is in a bubble, it won’t be quiet in any bullion dealer’s office irrespective of where they are.

Until next week

Warm Regards

Jordan Eliseo

Disclaimer

This publication is for educational purposes only and should not be considered either general or personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, and past performance is not necessarily indicative of future performance. Any prices, quotes, or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.