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Gold Drops Dollar Correlation

Friday’s Sharp Decline in Gold Prices Hearkens a Potential Divergence From Dollar Momentum

gold

After months of the instruments closely tracking changes, Friday’s price momentum in gold and the US dollar raise the possibility that a historical correlation is breaking down. The idea of the instruments’ prices moving more independently could signal that investors are concerned more with potential dollar appreciation and continued deflation than the possibility of heightened global uncertainty and higher inflation.

Gold Prices Ditch the Dollar

In a stunning change of momentum, gold prices disconnected from the strong inverse-correlation to the US dollar on Friday, plunging by over $20 points within a very short period of time while outpacing weakness in the dollar. Typically, the opposite would occur with gold prices ticking higher on the softness in the US dollar, however, this marked a change in prevailing momentum, heightening the risks of a serious correction lower in gold prices. With the multi-year trend lower intact and two longer-term technical patterns beckoning a more bearish outlook, there is a strong possibility that prices could fall below long-term support at $1140 per troy ounce. The descending triangle pattern which has been in formation for several years continues to experience a consolidation while the medium-term head & shoulders bearish pattern also highlights the bearish bias in precious metals. Any strengthening in the dollar could see a substantial pickup in momentum lower for gold prices.

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xauusd04272015

Looming European Bond Bubble

As the ECB’s Mario Draghi fires the bazooka of monetary policy with his quantitative easing strategy, his policies have been attributed to the vast gains in regional equity benchmarks while heightening the risk of a bubble in sovereign debt. With many portions of sovereign yield curves trading in negative territory, the risk is growing for holders of certain maturities. Since the commencement of the latest iteration of talks between Greece and European Finance Ministers, the sides have again found themselves deadlocked in negotiations for new money. Although the EU Finance Ministers have clarified that the latest reform implementation is not enough to unlock the next tranche of bailout funds, they are trying to prevent a possible run on banks. Capital controls are looming over Greece as local governments are asked to park excess cash reserves at the Central Bank so salaries and pensions of public servants can be paid.

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dax-jun1504272015

Saudi’s Resume Bombardment

After marking the end of the first phase of halting the swift advance of the Houthi rebels in Yemen, Saudi Arabia resumed its aerial and naval bombardment campaign yesterday in a sign that the longer battle for restoration of the government is still in its early phases. While the initial campaign was able to substantially neutralize offensive capabilities of the rebels that could disrupt key shipping lanes and possibly target neighboring Saudi Arabia, the ground campaign will be imperative to restore the Hadi Administration’s rule. Crude oil prices continue to test multi-month highs with the spread between Brent and WTI widening substantially after narrowing early last week. The spread is just above $8 points at present, near the historical spread between the two products of $8-10 after rebounding from just over $5.50. Even with growing production and inventories near full capacity, oil prices continue to display bullish momentum in the near-term.

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Crude Oil Ascending Triangle Technical Pattern

Even with the oil patch grappling with rapidly expanding inventories which could be the force in the next downwards correction in the instrument’s valuation, prices remain elevated and are poised to move higher on military uncertainty in Yemen. US production still remains near multi-decade highs despite output dipping modestly. The dropping rig count has been a sign to traders that the pullback in investment in oil production will buoy prices in the near-term as production is set to slow in the coming months. The ascending triangle setup in West Texas Intermediate crude oil prices has a bullish bias with a consolidation between a near-term uptrend and resistance at $58.60 presently underway. Any move above resistance should be considered a breakout trade with the possibility of prices gaining an additional $3-4 points on heightened momentum and volume. However, a move below the uptrend line could signal a deeper correction in prices.

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