Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16
The Peak Oil Paradox Revisited - 19th July 16
SPX Challenges the Upper Trendline - 19th July 16
Missing ’28 Pages’ of the 9/11 Report Released into Blitzkrieg of World Events - 19th July 16
Likelihood of Organized Disruption at GOP Convention - 19th July 16
More on the ‘Breadth Thrust’ and Stock Market Internals - 19th July 16
FX Traders: Get a Free Week of Forecasts (Details inside) - 19th July 16
Ups and Downs in Gold and Crude Oil Price - 19th July 16
Keep an Eye on ‘Bitcoin’ as the Next ‘Financial Crisis’ Starts! - 18th July 16
Erdogan Might Have Known about the Coup but Didn’t Prevent It on Purpose - 18th July 16
More Deflation Ahead: Silver, Gold And Their Mining Stocks A Must-Have - 18th July 16
Stock Market Minor Top? - 18th July 16
5 Best Gold and Silver Junior Mining Stocks in 2016 - 17th July 16
Gold And Silver – NWO-Created Tragedies Will Never End, Seek Truth - 16th July 16
How Long Can Buybacks Continue To Support A Market Which Is Standing On A Fundamentally Flawed Premise? - 16th July 16
Will They Come For Your IRA? - 15th July 16
Gold’s Record Selling Overhang - 15th July 16
Capitalism Has Entered a New Era—and Historic Stock Market Investing Returns Are Gone Forever - 15th July 16
Gold Price Could Hit $5,000 or Even $10,000 in a Few Years - 15th July 16
Junior Gold and Silver Mining Funds or Individual Gold and Silver Mining Stocks - 15th July 16
The Soaring Risk of Flying in Bernanke's Helicopter - 15th July 16
The Broad Stock Market, Helicopters and Gold - 15th July 16
The Curious Case of Vanishing Lady Liberty; Only Gold and Silver Remember Her - 15th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Forex Forecasts

Gold Remains Weak In This Disinflationary Environment

Commodities / Gold and Silver 2016 Jan 26, 2016 - 06:47 AM GMT

By: InvestingHaven

Commodities

Gold is struggling. Gold bulls will tell you that the yellow metal is doing great, as it has gone up since the start of the year, while stocks and most other commodities have come down. That is obviously only part of the story. As fear among investors has exploded in recent weeks, one would expect gold’s fear trade character to manifest itself. So far, the fear trade has been contained.


Gold’s trend is still down, until proven otherwise. Our chart tells a clear story: after a consolidation period in 2012 and a trend change (see in red on the chart below), gold has been moving in a clear trend channel. Since last January, the yellow metal has failed to even test its resistance line.

So the question really is what we can derive from the leading indicators in the precious metals complex.

One of the indicators, according to our methodology, is the futures market structure, particularly the short positions of commercial traders. In order to understand the underlying dynamics, we use an analogy: the faster commercial net short positions increase, the more stopping power they create to cap a rally. In that context, one can clearly see in the lower pane of the next chart how commercial traders are capping rallies as every time gold’s price nears resistance (since 2012). Readers can do the exercise by comparing the peaks since 2013 on the chart above, and see how that coincides with peaks in net short positions of commercial traders on the chart below (blue bars, lower pane).

Today’s futures positions are still relatively low, and the rate of change is low as well, as indicated with the green rectangle. We interpret this as ‘there is sufficient upside potential’ but probably within the boundaries of the downtrend. We will not get excited about gold until it proves able to break out of its trend channel.

One sidenote: it could be an encouraging sign for gold bulls that commercial traders need increasingly more stopping power (read: higher short positions) to cap the rallies, a trend started in the summer of 2013. We don’t read too much in that trend, at least not yet, but we keep a close eye on it.

It is hard to imagine that gold could perform well after such a huge performance of the U.S. dollar. It is no understatement to say that the dollar has recently confirmed its secular breakout. Since August of 2014, the dollar has put enormous pressure on markets, and, particularly, crude oil, after a monster rally of 30% in less than a year. That has only happened before in 1997, and we know from that time period that pressure eased after the dollar’s first leg up. If history is any guide, we will see a continuation of the bull market in the U.S. dollar but with less pressure on other segments on the market.

A strong dollar, however, is deflationary (or disinflationary at best). And this is a key concern for precious metals. Low inflation expectations are THE key driver for precious metals, period.

The head of the European and U.S. central banks are struggling with ‘their inflation target’. The Financial Times wrote earlier this month that the ECB has missed its inflation policy target of 2 pct for four consecutive years. “The target has lost credibility. Once people have lost confidence in an inflation target, it becomes very hard for the central bank to persuade them to trust the target again.”

Mrs. Yellen has also difficulties achieving the 2 pct inflation rate, a key objective of U.S. monetary policy. Bloomberg notes that the inflation rate could have risen with 11 pct year-on-year (which is a relative increase), but “the latest advance will curb already slowing economic growth and put downward pressure on an inflation rate that the Fed judges is too low as it is.”

For clarity, we are not saying that we agree with any of these objectives, or policies. We are simply looking for leading indicators for the precious metals complex, and inflation expectations is known to be one of them.

A third indicator is the gold mining sector. Gold miners are consolidating around their lows since last summer. The charts of gold mining indexes like the HUI or GDX are so boring we even do not include them here. The message from the gold mining sector is one of weakness, even with a crashing crude oil price (one of the key input costs for mines).

A chart worth including, however, is the stocks to gold miners ratio, not only because intermarket dynamics are a fundamental aspect in our methodology, but also because stocks have been weak in recent months. Even in that context the ratio has not been able to reverse its trend, as seen on the next chart. In our own words: gold miners confirm what the other indicators are telegraphing.

CONCLUSION:

Gold remains weak, and its leading indicators do not signal any strength. We closely watch the rate of change of net shorts position of commercial traders, as well as strength in the U.S. dollar (read: disinflationary pressure). Gold miners should rise sharply with a break out of gold’s trend channel, before even thinking of a trend reversal.

http://investinghaven.com

Analyst Team
The team has +15 years of experience in global markets. Their methodology is unique and effective, yet easy to understand; it is based on chart analysis combined with intermarket / fundamental / sentiment analysis. The work of the team appeared on major financial outlets like FinancialSense, SeekingAlpha, MarketWatch, ...

Copyright © 2016 Investing Haven - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife