Gold prices corrected sharply overnight, with the price of the yellow metal falling as low as USD $1214 per ounce, with silver following suit, trading as low as USD $15.13 per ounce before stabilizing somewhat.

Prices for Australian dollar investors have also pulled back, with the local currency still stubbornly sitting above $0.75 per ounce. AUD gold is currently trading at $1620 per ounce, whilst silver is sitting at AUD $20.40, an area that has proved very good buying for most of the last year.

The price decline we’ve seen overnight has not come as a huge surprise, with a pullback expected for much of the past two to three weeks. Speculative and commercial positioning in the futures markets had suggesting precious metals were short-term overbought, and this kind of weakness is often a good thing, setting the market up for another move higher.

We will take a more detailed technical look at where the market sits today, after this pullback, and where the key support lines are late on in this report.

Dovish Fed but Lower Gold

Some precious metal investors were no doubt a little surprised that gold didn’t push higher in the aftermath of the dovish comments from the Fed last week, which all but confirmed the view that we will see at best one or two more rate hikes in 2016 in the United States, not the four that were originally planned at the start of the year.

The tragic events in Brussels earlier this week would also typically have given gold a ‘safe haven’ boost, but the overall corrective trend is still in place, with gold progressively weakening since the start of March, when the PM Fix hit USD $1277.50 per ounce.

We aren’t especially surprised at these developments in metal prices, as the dovish noises emanating from the Fed were largely expected after the equity market volatility of January and February 2016. Indeed it was those expectations that had led to the circa USD $200oz gold rally in the first two months of the year, further evidence that the eternal market wisdom of ‘buy the rumour, sell the fact’ applies to precious metals too.

Note that the weakness over the last three weeks hasn’t yet appeared to dent demand too much, with gold ETF holdings continuing to grow. The following chart from Bloomberg makes that clear, highlighting the new appetite for precious metal investment that we’ve seen develop since the start of the year.

As you can see, holdings have been climbing almost uninterrupted since January, though they still have a long way to go to get back to the highs of 2011. And whilst financial market volatility has abated in the last few weeks, political developments, fears of a Brexit (which is firming in the odds) and the continued rise of Donald Trump are no doubt stimulating precious metal demand.

It will be interesting to see if we see any of the investors who only started buying gold through ETFs in late February of early March of this year throw in the towel in the next few weeks, or whether they’ll stay the course here.

What happens in this space remains to be seen, though we think if gold can stay above USD $1180-USD$1200oz, there is no major reason to investors to panic out. As to whether the market will likely hold those levels for gold, lets take a look at the charts.

Technical Perspective

with John Feeney

As we’ve discussed in the technical perspectives from the last few market updates, we’ve been expecting the pull back in USD and AUD gold that is now taking place. Gold broke through some serious resistance levels in this rally, which is the key point for investors to remember. A such, despite the fact these pullbacks can cause a little nervousness short-term, they can also be looked at as opportunities, and we are still of the view the rally we’ve seen since the start of the year did mark the start of a new bull market in gold. We remain of the view that the bottom for gold was indeed around $1,030 in December 2015.

Only time will tell, but what was most relevant for this rally in 2016 from a technical perspective was a break through the downward trend line that has kept a lid on gold in USD the past few years.

This pull back puts AUD gold at around $1,610 this morning – some $140 an ounce lower than a few weeks ago. This is the very reason we consistently speak about dollar-cost-averaging, particularly into weakness.

Anyone who was a first time buyer above AUD $1,700 per ounce might find this current pullback a little nervous, but we certainly wouldn’t be panicking, even if the pullback pushes gold a little lower in the days ahead. Commercial shorts were massively built up at the peak of this rally so we could have some more unwinding to come for US gold.

All we need is gold to consolidate above the key support levels, which we’ve shown in the chart below, which looks at the USD gold price.

The above chart also shows the overbought indicator on the RSI, which appeared a few weeks ago and which is now unwinding, and a sell sign on the MACD indicator that came into play at about $1,270. The Horizontal lines are two of the next key areas of support. The psychological level of $1,200 followed by what has been a key support/resistance level of late, which is the $1,180 level. Note the 50DMA lies around these levels too.

Although the charts are warning of the potential for some more short-term weakness in the USD gold price, we are not so sure there will be much more downside in AUD gold from here.

Currently sitting around the AUD $1,620 per ounce level, we have much better buying at these prices, and we’d be adding to positions near these levels.

We are closely watching the Australian Dollar at this point, as it too looks a bit overbought on the chart below. MACD is just about rolling over to give a sell sign and the Williams Oscillator has been signalling overbought above 75c, and too has just given a sell sign. RSI is already falling away. Everyone seems quite bullish on the AUD all of a sudden, which is usually an indication that a short-term top should be in place.

As such, the charts are telling us that there is a good sign the AUD will ease back from here, which will bolster bullion prices for local investors. The interplay between these two cross rates (AUD vs. USD) and USD vs. Gold continue to be fascinating, though for the end investor in Australian dollars they reinforce our earlier point about dollar cost averaging.

HSBC Warms to Gold

The recent pullback in precious metals hasn’t scared off analysts at HSBC, who are warming to precious metals. Noting a bearish view on the USD, a dovish FOMC and the impact of negative interest rates as reasons to look at the potential for gold prices to appreciate, HSBC also noted that, counter-intuitively, gold often rises alongside hikes in interest rates.

This is something we at ABC Bullion have often pointed out to clients, with the “gold will fall as interest rates rise” argument one of the great myths of gold investment. For further evidence of this, see below the following charts, which came from the report from HSBC, which can be found in full here.

We’re of a view that rates won’t go much higher anywhere in the developed world anytime soon, but the chart above is comforting evidence that even if we are wrong on that, there is no need to believe it will have a negative impact on gold prices.

HSBC see gold heading as high as USD $1300 per ounce by the end of 2016, which would mark a fantastic calendar year return for investors who stay the course. It would also imply AUD gold could end the year above AUD $1850 per ounce, assuming the currency eases between now and the end of the year, and settles around the $0.70 mark vs. the US Dollar.

Australian Housing

Not that it is directly precious metal related, but we thought we’d finish with a couple of reports to do with the Australian housing market, and how that dovetails with the broader economy. The first of these is a report from Business Insider that suggests that bad bank loans for ANZ have blown out again, rising to $900 million.

This is of course a trivial amount in the context of the ANZ PnL and Balance sheet, but it’s a sign that the tide is turning and times will be tougher for the major banks going forward.

You can read the report re ANZ here.

Secondly, we’ve seen that AMP has, like many other lenders, decided that there is indeed some risk in all these apartments being built around the nation, despite the fact the ‘housing construction boom’ is meant to help us ‘rebalance’ from the end of the mining boom.

The end result is that AMP have effectively ‘blacklisted’ lending in a number of areas, including Docklands and Southbank in Melbourne, as well as Homebush and Arncliffe in Sydney.

You can read more about it in this article here, which also has a great chart on unit and apartment approvals in all states going back to 1988. That’s a boom!

Moving beyond the ANZ and the AMP specifically, we were also interested in this report from Residex, which suggest the Australian housing market is starting to experience a slowdown.

Most interestingly, that slowdown is not just affecting Perth, Darwin and Queensland (two of which are highly dependent on resources), but also Melbourne and Sydney, where there was a reduction in median values in the February quarter.

If this is the start of a prolonged period of price weakness, then we can expect much lower interest rates in Australia, with the RBA almost certain to cut rates in order to support the $6Tn domestic housing market, as well as the economy itself, which is highly dependent on ever expanding housing ‘wealth’.

That is bearish for the Aussie dollar, and another reason to own physical precious metals in your portfolio.

Until next week

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.