Best of the Week
Most Popular
1. Trumponomics Stock Market 2018 - The Manchurian President (1/2) - Nadeem_Walayat
2.Yield Curve Inversion a Remarkably Accurate Warning Indicator For Economic & Market Peril - Dan_Amerman
3.China is Now Officially at War With the US and Japan - Graham_Summers
4.Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18 - Plunger
5.Stock Market Longer-Term Charts Show Incredible Potential - Chris_Vermeulen
6.U.S. Stock Market Cycles Update - Jim_Curry
7.Another Stock Market Drop Next Week? - Brad_Gudgeon
8.The Death of the US Real Estate Dream - Harry_Dent
9.Gold Market Signal vs. Noise - Jordan_Roy_Byrne
10.The Fonzie–Ponzi Theory of Government Debt: An Update - F_F_Wiley
Last 7 days
SPX Losing Gains - 17th Aug 18
What Gold Is Not - 17th Aug 18
Dollargeddon - Gold Price to Soar Above $6,000 - 16th Aug 18
Stock Market Higher Again, Correction Over? - 16th Aug 18
Up Your Forex Trading Game - 16th Aug 18
Large Caps Underperformance vs. Small Caps is Bullish for Stocks - 16th Aug 18
“The Big Grab” - Failing Pension and Retirement System - 16th Aug 18
How US Indo-Pacific Vision Forgot Asian Development - 16th Aug 18
Impulse Moves in the Currencies - 15th Aug 19
Best Merlin UK Theme Park Summer Holiday 2018 - Thorpe, Alton Towers, LegoLand or Chessington? - 15th Aug 18
The Essence of Writing an Essay that Must be Understood - 15th Aug 19
Is Solar Energy Rising From The Ashes Again? - 15th Aug 18
A Bullish Bond Argument That Hides in Plain Sight - 15th Aug 18
Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - 15th Aug 19
A Depressed Economy And A Silver Boom - 15th Aug 19
Moving Averages Help You Define Market Trend – Here’s How - 14th Aug 18
It's Time for A New Economic Strategy in Turkey - 14th Aug 18
Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - 14th Aug 18
Dow Stock Market Trend Forecast 2018 - Video - 13th Aug 18
Stock Market Downtrend to Continue? - 13th Aug 18
More Signs That the Stock Market Will Rally Until 2019 - 13th Aug 18
New Stock Market Correction Underway - 13th Aug 18
Talk Cold Turkey Economic Crisis - 13th Aug 18
Which UK Best Theme Park - Alton Towers vs Thorpe Park vs Lego Land vs Chessington World - 12th Aug 18
USD is Rising. What this Means for Currencies and Stocks - 12th Aug 18
Hardest US Housing Market Places to Live - Look Out Middle Class - 12th Aug 18
America’s Suburbs Are Making a Comeback - 12th Aug 18
Stock Market US Presidential Cycle, Seasonal Analysis and Economy - Video - 12th Aug 18
Yield Curve Inversion and the Stock Market - Video - 11th Aug 18
Land Rover Discovery Sport 1st Dealer Oil Change Service - What to Expect - 11th Aug 18
How to Setup Webinars and Use Them to Overcome the Barriers in E-Learning - 11th Aug 18
Big US Stocks’ Q2’18 Fundamentals - 11th Aug 18
Dow Stock Market Trend Forecast 2018 - 10th Aug 18
SPX Testing Its First Support Level - 10th Aug 18
Dreaming of a "Comfortable Retirement" on a Public Pension? - 10th Aug 18
The Forrest Gump of All Future Democrat Election Losses - 10th Aug 18
More Uncertainty as Stocks Got Closer to January Record High - 10th Aug 18

Market Oracle FREE Newsletter

Trading Any Market

Will the Great Unwind Sink Gold?

Commodities / Gold and Silver 2018 Feb 05, 2018 - 01:54 PM GMT

By: Arkadiusz_Sieron

Commodities

In the August 2017 edition of the Market Overview, we analyzed the hawkish turn among major central banks. We pointed out that “Europe has recently been among the most surprising positive economic regions in the world”, which should induce the ECB to taper its quantitative easing program in the fall, supporting both the EUR/USD exchange rate and the price of gold. This is exactly what happened. The dollar lost more than 3 percent in 2018 against the euro, while gold jumped above $1,350 (as of January 25). As we noted in the previous edition of the Market Overview, “the beginning of the year is usually a good period for the gold prices.”


And the best might be yet to come. Why? The answer is: the Great Unwind. In the last few years, the Fed was the only hawk in town. When the majority of leading central banks remained very accommodative, the U.S. central bank heroically raised interest rates and started to unwind its balance sheet in a lonely struggle for the normalization of monetary policy. The chart below doesn’t show a significant reduction, but we see that the amount of the Fed’s assets remained roughly stable since 2015 and started slightly declining recently.

Chart 1: Fed’s balance sheet (red line, right axis, in trillion of $) and the gold prices (yellow line, left axis, London P.M. Fix, in $) from 2013 to 2017.

Now, with strong economic momentum in Europe and with the Bank of Japan saying that it would buy fewer long-term bonds, the situation is completely different. Or maybe not, but the investors’ expectations changed. And conjectures based on hopes and fears are what drive the markets. So let’s look at the premises behind these beliefs.

First, the growing economic recovery in the Eurozone spurs investors to believe that the ECB will tighten its monetary policy sooner rather than later. The minutes from the December 2017 meeting added fuel to the fire, as investors could read that “members expressed confidence that the euro area economic recovery had now moved into expansionary territory”, which “increased the level of confidence in a sustained return of inflation towards the Governing Council’s aim”. Ten yards for euro bulls.

And the political risks may start to abate after the March election in Italy and after German parties form a new government (it is still an unresolved issue, but the main German parties have recently reached a breakthrough in the process, as the Social Democratic Party approved the start of formal coalition negotiations with Angela Merkel's Christian Democrats). Another touchdown.

Second, Japan’s economy also started to recover, and the Bank of Japan Governor Haruhiko Kuroda offered a positive view on the economy and inflation. In particular, he said that the core CPI rate was “moving around 1 percent”, an increase from 0 percent three months ago. In the latest quarterly report on regional areas of Japan, the bank also offered its most optimistic view in nearly a decade. The increased inflation and moderate economic expansion prompted investors to believe that the Bank of Japan may wind down its monetary stimulus, especially after the central bank’s announcement about fewer Japanese government bonds purchases.

Last but not least, other central banks could also cut back on their asset purchases. In particular, the Swiss National Bank is under less pressure to buy foreign assets as the Swiss franc weakened substantially, returning more or less to the level before the currency was de-pegged. So if the SNB normalizes its monetary policy, it may shake the asset markets.

What does it all mean for the gold market? On the one hand, less dovish central banks would imply softer demand for Treasuries and higher bond yields, which gold shouldn’t welcome. On the other hand, the rising expectations of more hawkish ECB and BoJ are likely to sink the U.S. dollar. Indeed, the euro hit a three-year high in mid-January amid rising market odds of an ECB interest rate hike in 2018. Similarly, optimistic comments from BoJ Governor Haruhiko Kuroda sent the yen to a four-month high against the U.S. dollar. As a result, gold prices rallied, which signals that the currency channel is more important for the yellow metal than the yield channel, at least in the short run.

Moreover, any surprising monetary tightening in Japan could be the trigger that will halt the current rally in the global stock market, which could be positive for gold, as an alternative asset class. Theoretically, the same applies to the Eurozone, but a paradigm shift in Japan is likely to have a larger impact, as a ECB hawkish turn is more widely expected. And investors shouldn’t forget that many important trends started in Japan – remember January 2016, when BoJ introduced negative interest rates?

To sum up, given the global economic recovery, it seems that the major central banks may adopt a more hawkish stance soon. The Fed has already started unwinding its vast balance sheet and hiked the federal funds rate a few times. The U.S. central bank is expected to continue its gradual tightening this year, but this has been largely priced into gold (although, the new FOMC may be more hawkish than expected). Meanwhile, although the normalization may not come quickly, investors are quite sensitive to changes in the prospects of the monetary policies in the Eurozone and Japan. Hence, there is room for further declines in the U.S. dollar – the strongest tailwind for gold.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2018 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

6 Critical Money Making Rules