Gold Prices March Higher

Daily Analysis - 18/05/2015

Precious Metals Rally on Softness in Consumption Measures


The prevalent weakness in the dollar comes on the heels of a massive uptick in precious metals prices which has left many traders surprised at the momentum higher. In spite of a fairly strong inverse correlation with the US dollar, gold continues to make outsized moves higher relative to the extended weakness in the dollar.

Gold Gains on Dollar

US economic fundamentals continue to stumble as evidenced by the raft of data that missed expectations last week. Most concerning following the weak retail sales numbers was the slide in sentiment. The Michigan Consumer Sentiment index tumbled from 95.9 to 88.6 in the latest period, further proof of consumer headwinds preventing more robust growth. The dollar sank on the announcement, seeing further gains in gold prices. According to the latest Commodities Futures Trading Commission (CFTC) data released last Friday, net speculative positioning in gold saw speculators add to long positions after the prior week saw a major dip. Long positions rose from 72,400 contracts to 77,400 contracts in the latest week as gold prices held above $1200, crossing key technical levels to the upside and breaking higher to 3-month highs.


Chinese Home Prices Fall

In another setback for Chinese policymakers, housing prices released overnight continued to fall, clocking in at a -6.10% annualized drop. China has eased monetary policy on multiple fronts, whether through interest rate cuts or reserve ratio cuts hoping to reverse the decline, but these measures have been largely ineffective at spurring growth. Recently announced measures to let local governments restart borrowing, including in the shadow banking sector, add to notion that the People’s Bank of China is pursuing a quantitative easing strategy that will focus on monetizing regional debt. This comes on the heels of a sharp uptick in nonperforming loans on bank balance sheets, hence the rationale for weaker loan growth and lending metrics. The Shanghai Composite is trading modestly weaker on the back of disappointing housing data while the Hong Kong dollar has strengthened since the announcement.


IMF Memo Sets Stage for Greek Default

As Greece scrambles to find every last Euro to repay pending obligations to the “institutions” a recently leaked IMF memo shows that the efforts are mostly fruitless. Unless Greece manages to secure an agreement with creditors, the likelihood of a default has increased markedly. According to the memo, “Greece won’t be able to make IMF repayments, beginning with a June 5 payment.” Greek officials have no comment in relation to the leak, but have promised that they will continue to pay public salaries and pensions despite the lack of cash and government tax revenues. Moreover, Greece has yet to submit the list of proposed reforms to Brussels for reviews, ensuring that the latest negotiation will come down to the wire. The Euro continues to largely ignore this possibility, rallying sharply on Friday even though pairs have since retreated from the earlier bidding.


Crude Oil Equidistant Channel Technical Pattern

Rising production has failed to impact oil prices which remain elevated on the dropping rig count coupled with recent American inventory drawdowns. The announced ceasefire in Yemen to allow humanitarian aid has not seen oil prices dip as an Iranian aid vessel approaches Yemeni ports. This has drawn strong condemnation from Saudi Arabia and raises the prospect of tensions between the two nations boiling over. The upward trending equidistant channel pattern in the July WTI contract exhibits a bullish bias, signaling further upside. The prevailing strategy for taking advantage of the technical setup is positions at the lower channel line closed at the upper channel line. Fighting the trend is risking considering diminished potential reward characteristics.


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