Fibogroup Market Analysis 2017

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The uncertainty surrounding US tax reform is likely to see gold well supported over the next few weeks as although both sides of the senate agree something needs to change, they strongly disagree on how to go about it. The republicans would like the corporations and wealthy individuals to benefit while the democrats would like to see a more broad tax reform that includes everybody.

If we look at the chart the trend looks pretty promising. After hitting $1,270 in yesterday’s trading session the bulls stepped in and pushed the precious metal quickly back into the trading range which has formed over the last month.

As long as we see higher bottoms things are looking good and the occasional break below the support line should be of no concern.

Gold still needs to break above the top line of $1,290 before we believe a true bull trend will be in place which may be difficult in the coming week as we get closer to the near certain rate hike by the US Federal Reserve next month.

A pull back in gold on the basis of a rate rise may be a good opportunity to enter the market as history shows gold tends to be oversold in the lead up to an expected rate hike with a rally followed by the decision.

 

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The Australian dollars remains under further pressure today, following on from yesterday after disappointing jobs figures which all but guarantees the RBA will keep rates on hold for the foreseeable future.

This factor will hurt the Aussie dollar’s attractiveness as a high yielding currency which has been a major factor in supporting the currency in recent times.

“The yield spread on Australian and US 2-year bonds is at just a little over 6 points, while the Aussie 10-year is offering a pick up of just 20 points to bond investors. You can hear the shouts of “why bother” in Boston, New York, and Newport from here,” noted AxiTrader’s Greg McKenna

“The Aussie will continue to under-perform until that spread turns around or until the AUD falls far enough to look like value. That’s not likely until there is a 73 cent handle on it ,at least.” He added.

Looking at the chart things are looking pretty grim from a technical point of view as well.

We can see the formation of a bearish head and shoulders pattern with a lower neckline which may be a signal of further losses to come.

At the time of writing this article the Aussie dollar has found some support at around the US75.50c level which it reached last time in June of this year.

Any break below this critical level will likely open the flood gates and. See a pullback to around US73.80c

 

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The gold price is slightly lower in today’s European trading session although it is still hovering around 1 month highs as fears grow that US President Donald Trump’s tax plan is on the verge of falling apart.

Roy Moore, candidate from Trump’s Republican Party who is the candidate in the upcoming senate elections for the state of Alabama on December 12th is refusing to step down in light of allegations that he sexually assaulted at least 5 girls while in his thirties.

Up until 2 weeks ago, Moore was a sure thing to get elected but after the Washington post released the devastating news last week, he has slumped in the polls and now the Democratic candidate Doug Jones is favored to win.

So what does this mean for gold?

The US dollar has been powering ahead in recent weeks as expectations grew that Trump would be able to deliver his tax reforms with a comfortable majority in the senate but if he loses Alabama, that majority will become unstable.

It will leave the Republicans with only a one seat margin to pass legislation which means it will only take one senator to cross the floor( At least 2 senators don’t support the new tax policy in its current version) and the deal will fall apart.

This will be devastating for the US dollar and gold will receive a huge boost.

"Friday's move higher has definitely improved gold's chart patterns, but it remains to be seen if this will be enough to attract fresh fund buying," said INTL FCStone analyst Edward Meir.

"Much of this will depend on the progress or lack thereof that the U.S. tax bill makes in the Senate. If efforts to pass it flounder, we could see a much sharper correction set in over U.S. equities, prompting another leg higher in gold." He added

 

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After falling sharply on Monday, the gold price has stabilized over the last 2 days and it looks as if for now, the precious metal has found strong support whenever it drops down towards the $1,280 level.

It seems with all the geopolitical events happening in the world at the moment such as Brexit, North Kore’s nuclear program and proposed tax reforms in the US, investors are unwilling to exit gold in big numbers because if any one of the big events above turn sour, gold is going to see major upturn.

"Event-driven bids for gold seem to be occurring more frequently and may be the new normal, In short, even as the rates and forex channel dominate the outlook for gold pricing, the yellow metal is increasingly being used by investors as a policy and tail risk hedge.” Noted analysts from Citi bank,

In the short term, the news to watch out for is the release of the minutes meeting from the Federal Reserve released later today and at the top of the agenda will be interest rates.

A December hike is already priced in so the big question is how many rate rises next year are possible? The recovery of the US economy is far from complete so the Fed won’t want to spook the market too much and we think they will be very cautious on the question of further hikes which may benefit gold today.

From a technical view on the gold chart, we can see the although gold has been stuck in a tight trading range for the best part of a month, it keeps making higher bottoms which shows the uptrend is still intact as well as the double bottom that formed in October and November.

 

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The gold price remains well supported today after yesterday’s stellar gains on the back of a less than convincing speech from The US Federal Reserve which left investors questioning the amount of rate hikes the central bank will deliver next year.

Although a rate hike in December is a forgone conclusion, the amount of rate hikes now in 2018 is in serious doubts after yesterday’s minutes meeting from the Fed where some board members noted that persistently low inflation was a major concern and they are resigned to the fact that it may stay lower for longer.

"The Fed has some inflation concerns and we don't know how it's going to be in the medium term. There is lot of uncertainty everywhere and you can see it in gold's rang bound movement." said John Sharma, an economist with National Australia Bank

The news left investors fleeing the US dollar which had its biggest fall in 5 months and into gold as further rate rises will be driven by positive data which many anticipate includes a pickup in inflation.

"Although the minutes seemed to tick a December hike as a done deal, traders took fright at their more 'data-driven' neutral stance into 2018," said Jeffrey Halley, a senior market analyst with OANDA.

With interest rates in the US still at record lows and unable to boost inflation, the chances of gold moving higher have significantly increased as the market comes to terms that the Fed will be unable to hike rates much further out of fear of derailing the recovery in the US economy.

 

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The gold price has drifted slightly lower for the 2nd day in a row on the back of profit taking as the US as the US celebrates thanks giving but some predict it’s only temporary and rebound is on the cards next week.

The main beneficiary for gold is going to be the inevitable pullback in the US dollar which investors have been flocking to over the last few months in anticipation of future rate hikes from the US Federal Reserve which doesn’t look as certain as previously.

Most in the market believed that the Fed would hike rates 4 times over the next 13 months with the next one coming in December followed by another 3 hikes next year as the US reaches full employment and business confidence surges due to the proposed tax cuts to be introduced next year.

Some analysts now believe that only 2 more hikes will be delivered from the Fed over the next year which will not be enough to support the US dollar as an interest bearing asset and investors will look elsewhere and gold is set to benefit

"I think gold will move back towards $1,300 next week or the week after, maybe on the back of dollar weakness," Georgette Boele, commodity strategist at ABN AMRO in Amsterdam, said. "There are still some longs in the market, so there's more technical momentum as they try to push prices up again to see what happens in the last weeks of the year."

 

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The gold price is making another run for the $1,300 mark in today’s trading session on the back of US dollar weakness and as the market gets ready for US President Donald Trump to meet with congress tomorrow to garner support for his tax reform package.


If Trump manages to convince congress of the benefits of his tax reform package, gold may suffer as the recent gains made have largely been in part due to the uncertainty of the tax reform.


"If we see finally some sort of movement in this area, that could reignite the trumpflation trade, risk assets could go to the races and we could see a pullback in gold as a risk hedge," said Mitsubishi analyst Jon Butler.
Also helping the gold price today was the Chinese stock market which had its biggest one day fall in nearly 2 years and left investors piling into safe haven assets such as gold.

Tomorrows testimony to congress from Jeremy Powell, Donald Trump’s pick to head the US Federal Reserve next year is likely to cause unrest in the markets and will probably lend support to the gold price until Powell’s nomination is confirmed.

 

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The gold price is trading slightly higher today as the market awaits the senate testimony later today from Jeremy Powell who is Donald Trump’s pick to be the next chairman of the US Federal Reserve.

In what may be a boost for gold, the next Fed president is expected to take a cautious approach on the question of interest rates and they may not be raised as fast or as higher as analysts predicted earlier,

"Powell’s decisions on rates are suggested to be almost indistinguishable from those of his predecessor, but I would not be surprised if in the next few months we see him taking a dovish path," saidActivTrades chief analyst Carlo Alberto de Casa .

"I don’t think he will push to raise rates too much, but will instead monitor US inflation and the job market." He added.

Golds next big test is coming towards the end of this week when the US senate convenes for a vote to adopt legislation on Donald Trump’s tax reform.

If the bill passes in its original state the gold price is expected to take a huge hit on the back of an expected rush towards the US dollar. If the measure fails to pass with the required number of votes or is changed before it passes, gold will benefit immensely and will finally break back up through the psychological $1,300 level.

"It will be keenly watched particularly the details of the cuts. There is a risk it could be slightly watered down than what was originally proposed by President Donald Trump," noted ANZ analyst Daniel Hynes said.

 

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The British pound continues to rise today against its US counterpart after rumors surfaced yesterday that the UK has reached a settlement to leave the European union.

The deal will see Britain pay between 45-55 billion pounds as it leaves the bloc, with the exact figure depending on how it is calculated.

This is one major hurdle out of the way for the British government as it tries to cut ties with the EU and leaves the BOE free to tighten monetary policy which should further benefit the sterling,

“The seemingly increased likelihood a Brexit transition deal makes it easier for the Bank of England to deliver on its signal that it intends to follow its first hike in a decade with further gradual tightening over the next few years,” noted Séamus Mac Góráin, a fixed income portfolio manager at JPMorgan Asset Management.

There are still 2 major unsolved issues at the moment about Brexit and if they are not solved in the coming weeks the pounds rise may quickly reverse.

The first is the free movement of citizens between the 2 countries which the EU has said is not negotiable but at this time the UK government is reluctant to agree to such terms.

The 2nd point is the border between Northern Ireland and Ireland which is a member of the EU. Installing a hard border would create chaos in the Area as well as significant problems for the UK economy.

 

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The gold price has certainly behaved strangely this week, failing to react to news which would usually send the precious metal considerably higher. In fact after North Korea launched another missile on Tuesday (A missile capable of hitting anywhere on the US mainland) gold actually fell and even Donald Trump’s statement after the launch that “We will take care of that situation.” Didn’t help either.

It seems as if the market is preparing to overlook significant events which would usually trigger a rally in gold which is why it has remained largely range bound between $1,270 and $1,300 for the best part of 2 months, making it one of the tightest trading ranges of the last decade.

The good news for gold is that it has also held up well against news that would usually push it lower including an expected rate hike from the US Federal Reserve next month as well as proposed tax reforms in the US which are likely to get the go ahead from the US senate this week.

As we approach the end of the year, and news such as rate hikes and tax reforms already priced into gold, some predict this tight trading range is bound to end and gold is poised to break out to the upside.

“It’s been eerily quiet in the gold and silver markets over the past few months. A breakout could happen as we approach this Fed meeting,” noted Michael Dudas from Vertical Research

“With this low volatility, an event can spark a move either way. We think gold is going higher” he added.