FiboGroup Market Analysis 2018

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The gold price has come under renewed pressure in today’s trading session as more investors head for the exit gates in favor of the US dollar in order to receive higher gains on their investments.

The US dollar has really gained traction since last week on the back of higher rates as well as some savvy moves from the Trump Administration.

"Gold prices remain dependent on the dollar prices at this juncture. The U.S. economy has been rosy and better than expected. Efforts by the Trump administration to reduce the trade deficit from an economic point of view has been friendly for the greenback as well," said Barnabas Gan, an analyst from OCBC

For the best part of a decade, the greenback hasn’t exactly been one of the highest yielding currencies and investors only bought it for its relative safety but over the last 12 months as the US Federal Reserve has been lifting interest rates, the dollar has also become attractive as an interest bearing investment which is something that gold is not.

More interest rate hikes also look to be on the way and the bullish tone of the Fed has only added fuel to the fire on gold’s demise which has caused not only a higher dollar, but also a booming stockmarket and if they are to believed, a rising US economy

The big question now is will gold retain its usual status as a safe haven as it has been widely known for of are those days coming to an end.

Some say in the short term at least, gold is likely to see further losses and may be headed down to a former resistance level and if that doesn’t hold it may be in for real trouble.

"Gold has been a seller's market for some time, but with the $1,190 level yielding, we're now firmly in the gold bear zone and as such with the dollar likely to strengthen on the back of widening interest rates differentials, selling activity could intensify with speculators likely to target the August low when the yellow metal hit $1,160 before rebounding," said Stephen Innes, APAC trading head at OANDA in Singapore.

 

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As widely expected, the Reserve Bank of Australia in their latest announcement earlier today decided to keep interest rates on hold at 1.5 percent and according to some analysts, we can expect the same result for some time with even the possibility of a rate cut not out of the question.

In the following monetary statement after the rate decision, the RBA offered a better than expected forecast of the Australian economy and especially with regards to the jobs market.

They noted that the unemployment rate remains low and is expected to decrease even further as time goes by

“The outlook for the labour market remains positive. The unemployment rate is trending lower and, at 5.3 per cent, is the lowest in almost six years. The vacancy rate is high and there are reports of skills shortages in some areas. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 percent” noted RBA governor Philip Lowe

“Wages growth remains low, although it has picked up a little. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process” he added.

Some say however that the RBA should forget the jobs market and be more concerned on the property market especially in light of the upcoming royal commission, which is expected to cause immense tightening in lending standards.

This will inflict more pain on an already battered property market with further losses of up to 15 percent possible.

“It’s a significant risk given the difficulty in gauging how severe the tightening in bank lending standards in the face of the royal commission will get and how investors will respond as their capital growth expectations collapse at a time when net rental yields are around 1-2 per cent,” noted AMP Capital chief economist Dr Shane Oliver.

Mr. Oliver is also one of the few analysts who predict that a further rate cut may be needed to shore up the economy and put the real estate sector back on track.

“Home price weakness is at levels where the RBA started cutting rates in 2008 and 2011, so we still can’t rule out the next move in rates being a cut rather than a hike,” he said.

 

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The British pound has received a boost in today’s trading session over speculation that Ireland is hand in hand with British Prime Minister Theresa May on her plan to settle the border issue between Northern Ireland and Ireland.

The news comes at the end of the Tory party conference in Birmingham where Prime Minister May laid out her Brexit plan going forward which included a customs union between the whole of the UK and the EU which was well taken by her party members and goes a long way to avoiding a hard border between the 2 countries.

The news benefited the pound but the currency didn’t push as high as it should have regarding the news as the EU has yet to accept the respond to the deal offered by May.

"The pound has not weakened as feared during the week of the Conservative Party conference. In fact, it has been overshadowed by a report from the FT , which suggests that Ireland is backing PM May’s emerging plan for an all-UK customs union with the EU. Said says Lee Hardman, currency strategist with MUFG

“The EU would have to provide some encouragement as well that it is warming to the idea for the pound to stage a rally in the coming weeks," he added

The EU’s response will be the key for the British currency in the coming days and if they are to accept, it may set the stage for a rally on hopes that a deal on Brexit should finally eventuate.

Any rejection of the offer is likely to see the pound continue its recent downtrend.

 

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After climbing in yesterday’s trading session back through the $1200 mark on the back of inflation worries, the gold price has once again pulled back as traders await today’s all important Non-Farm Payrolls figure from the US.

This economic news is seen as one of the main barometers in heling the US Federal Reserve deciding whether to lift interest rates any further this year so a strong reading today is likely to put pressure on the gold price at the expense of the US dollar.

Investors are currently enjoying the yields the US dollar currently provides which is something that gold does not give and is only valuable as a capital-gaining asset.

"A robust NFP non-farm payroll print coupled with signs of rising wage growth could fuel expectations over the Fed tightening policy faster than projected," said Lukman Otunuga, Research Analyst for FXTM.

"This is bad news for zero-yielding gold which losses attraction in a high-interest rate environment."

Some say the main hope for gold at the moment is rising inflation which is currently happening in the US as well as a number of other countries, and this factor may see money move into the precious metal as a safe haven investment to protect themselves against rising costs.

The room for further rate hikes is getting limited because the present level of the Fed funds rate is getting closer to neutral rate, estimated at 3 per cent by the FOMC members. That is why the Fed has removed “accommodative” word this time from the statement. This should drive the dollar lower thereby pushing gold prices higher.

The room for further rate hikes is getting limited because the present level of the Fed funds rate is getting closer to neutral rate, estimated at 3 per cent by the FOMC members. That is why the Fed has removed “accommodative” word this time from the statement. This should drive the dollar lower thereby pushing gold prices higher.

“Other world government bond markets are also seeing their yields rise, in sympathy to the U.S. This is yet another clue that creeping price inflation could become problematic down the road,” said Kitco Metals senior analyst Jim Wyckoff . “That’s a bullish scenario for hard assets like raw commodities, and bearish for paper assets like stocks and bonds.” He added.

 

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The gold price has been trending sideways since the beginning of August finding constant support around the $1200 mark and some say the precious metal has found a bottom and a rally is on the way at the expense of the US dollar.

Earlier in the year one of the world’s biggest fund managers predicted that a recession would hit the US around 2020 and as the situation became evident, the US dollar would begin to decline, paving the way for gold’s rally.

"I think we are in a pre-bubble stage that could go into a bubble stage. The probability of a recession prior to the next presidential election would be relatively high, maybe 70 percent, said Billionaire investor Ray Dalio, from Bridgewater Associates.

Some analysts however, predict the demise of the US dollar much sooner, which in their words would be a strong catalyst for the gold price, and give this as a reason for investors to gains some exposure to gold.

“We believe that the gold market bottomed in August, and that exposure to precious metals is a credible strategy to mitigate risk of a dollar collapse,” said John Hathaway, chairman of Tocqueville Management Corp. and fund manager of the Tocqueville Gold Fund.

In regards to the timing of the US dollar’s collapse, Mr Hathaway disagrees with Ray Dalio from Bridgewater and believes it will happen in the not too distant future.

“We disagree; we believe that it could happen sooner,” Mr Hathaway said.

“Dalio’s reasoning is the same as ours. We agree that a general loss of confidence in the U.S. currency is credible risk,” he added.

 

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The Saudi stock market tumbled more than 6.8 percent after US President Donald Trump warned "severe punishment" over the disappearance of Washington Post journalist Jamal Khashoggi and now there are fears the move could push the oil price closer towards the $100 a barrel mark.

This is just another factor of many which includes the upcoming sanctions against Iran which are likely to destabilize the oil market

Trump said he would soon be talking with the king of Saudi Arabia over the coming days and expected answers as this was something that the world could not accept and he demanded that the Sausi’s must come clean and tell all.

"We're demanding everything. We cannot let this happen, to reporters, to anybody” Mr Trump said

"We are very disappointed to see what's going on. We don't like it and we're going to get to the bottom of it," he added.

Representatives of the Saudi government have already come out fighting, strongly denying any involvement in the journalist’s disappearance.

They also note that any action against their country would be met with swift retaliation which left analysts scratching their heads as to what that may be.

"The kingdom affirms its total rejection of any threats and attempts to undermine it, whether by threatening to impose economic sanctions, using political pressures, or repeating false accusations. The Kingdom also affirms that if it receives any action, it will respond with greater action." They said.

 

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The British pound has recovered somewhat in today’s trading session after falling down below the $1.27 mark yesterday against its US counterpart as the market grow’s increasingly nervous on the possibility of a no deal scenario regarding Brexit.

Apart from all of the other problems a no deal situation is likely to cause, some analysts predict that the UK could fall into a recession, which would mark the 2nd one since the financial crisis of 2008 which would really help to extend the pound’s losses

“No Brexit news appears to be weighing on the pound as the clock keeps on ticking and politician edge ever so closely towards a now deal,” said Rodrigo Catril, Senior FX Strategist from the National Australia Bank.

“S&P overnight noted that the risk of a no-deal outcome had increased sufficiently to become a ratings consideration, and the ratings agency forecast a moderate recession in the event of no-deal.” He added.

The major hurdle for the formation of a deal between Britain and the EU is the question surrounding the border between Ireland and Northern Ireland.

One possibility floating around is that Northern Ireland will remain in the customs union after Brexit, which will essentially allow the free movement of goods, but at the same time create a border in the Irish sea which would effectively seal off Northern Ireland from the rest of the UK regarding trade

This scenario is unacceptable to the DUP party of Northern Island which is currently supporting the current UK government of Prime Minister Theresa May, and they say if a deal goes ahead the includes the 2 Ireland’s remaining in the same trading block, they will remove support for the current government which would trigger an early election and throw the UK into political turmoil.

"Brexit agreement over safeguarding against a hard border for Northern Ireland is proving elusive. It is impossible to see how, without that, a Withdrawal Agreement will be reached. For businesses, the longer the delay, the greater the uncertainty," says Brian Martin, Senior International Economist with ANZ Bank in London.

 

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The Australian dollar has continued to rise in today’s trading session after positive comments yesterday by RBA governor Philip Lowe Lowe and a shock result in the US midterm elections which some say may put pressure on the US dollar.

Australia has been one of the few countries unable to raise interest rates but Mr Lowe noted that he expects this to change over time as the job market strengthens and pushes inflation higher within the RBA’s target range of between 2 and 3 percent.

"The outlook for the labour market remains positive. With the economy growing above trend, a further reduction in the unemployment rate is expected to around 4¾ per cent in 2020. The vacancy rate is high and there are reports of skills shortages in some areas. Wages growth remains low, although it has picked up a little," Mr Lowe said.

In a stunning upset overnight, the democratic party in the US have regained control of the senate which means they can now put a stop to the unchecked powers wielded by US president Donald Trump which may be bad news for the US dollar.

Many of Trump’s policies such as sweeping tax cuts have have been a major boost for the US dollar but with his parties defeat in the elections, the chances od Trump pushing his political agenda through has been greatly diminished.

This may give the chance for currencies such as the Aussie dollar to regain some ground against their US counterpart something they haven’t been able to do for the best part of Trump’s presidency.

 

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The oil price has finally found some buyers today after falling for the past 10 trading sessions which marks its longest consecutive daily decline in more than 30 years and has now forced some OPEC members to reconsider their strategy regarding production cuts.

A committee of several OPEC members as well as other countries who export oil have predicted at current output, the oil market will reach an oversupplied state in 2019 and the only way to fix it is for some countries to cut production

"The Committee reviewed current oil supply and demand fundamentals and noted that 2019 prospects point to higher supply growth than global requirements, taking into account current uncertainties," they said

"The dampening of global economic growth prospects, in addition to associated uncertainties, could have repercussions for global oil demand in 2019 and could lead to widening the gap between supply and demand." They added.

After reaching a high of $77 in October, the oil price has now fallen more than 20 percent which technically puts the commodity in a bear market and some analysts predict that if we reach the next support level which was formed at the beginning of the year the price may go into free fall.

"Obviously when you get a 20 percent decline, you definitely get some technical damage. Not only have we broken below the 200-day moving average that a lot of people have talked about but, much more importantly, we've broken below the trend line going back to the early 2016 lows so that's a problem," said Matt Maley, equity strategist at Miller Tabak.

"What's the next support level? That doesn't come in until you get down to the $57.50 level. That was the February lows. You break below that, we've got real problems," he added.

 

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The British pound has surged higher after the big news out today that the EU and the UK have reached a tentative Brexit deal, which includes a solution to the touchy Irish border issue after nearly a year of negotiations.

Later this afternoon the motion is expected to go before UK Prime Minister Theresa Mays cabinet and the market is expecting some wild movements in the British pound once the cabinet decides.

If the cabinet approves the deal, the pound is likely to shoot past the $1.30 mark again and how high it will travel is anybody’s guess.

As is well known, May’s cabinet is only the first part of the approval process with the bigger hurdle being the House of Commons which many predict will be much more difficult as shown earlier today by some of her ministers who said they would not back the Brexit deal in its current form.

“We see potential for a rally of around 1% in the pound once a withdrawal deal is finalized by the EU and U.K. and then another, larger, rally perhaps 2-3% once that deal is ratified by parliament,” said Erik Nelson and economic analyst Abigail Kinnaman from Wells Fargo

“The period between the initial deal being reached and the subsequent ratification by parliament will likely be marked by ongoing volatility and uncertainty, which could see the pound retrench.” They added.

The analysts also noted that the pound could rack up losses of around 8 percent against its US counterpart should the deal fall through.