Commentary for Tuesday, May 19, 2015 – Gold closed down $20.90 at $1206.90 putting the brakes on its most recent move to the upside within its current trading range. So gold came down with a case of the sniffles today for two reasons. The first is related to a very strong dollar – the Dollar Index closed yesterday at 94.16 – today it has traded between 94.09 and 95.47 and as of this writing is 95.28! Today’s strength is actually against the most recent weaker trend which has supported gold.
And it’s the result of a much weaker euro created because the European Central Bank will front load its stimulus – meaning instead of parceling it out over a longer period of time it will allocate more money up front. This really does not change the program because they will simply have less available later – but it does get things rolling with a big bang.
The second reason gold reversed direction is simple – expected profit taking. It was too easy for paper traders to close their long positions and run for cover because most believed that recent strength would not lead to a break-out move and gold remained range-bound.
Still today’s close in gold of $1206.90 moves below its 200 Day Moving Average ($1216.00) and its 100 Day Moving Average ($1212.00). We are still above its 50 Day Moving average ($1192.00) but momentum is slowing which is not good if you’re considering a possible break-out to the upside in a market which has been channeled for some time.
Still it is important to realize that we have never had near zero rates of interest for years. My point being that the outcome of both our monetary easing and that of our European cousins still remains to be seen. And watching the price of gold is a good way of keeping track of who is on first base.
Look for more cues as to gold’s short term direction from the FOMC (Federal Open Market Committee) this week. Here is the schedule – May 20 (FOMC Minutes from April 28-29 @ 2 PM) – May 21 Speech from Vice Chairman Stanley Fischer – May 22 Chair Janet Yellen talks about the US Economic Outlook. Information release from the FOMC is always important but we are entering into a critical period in which no amount of opining will provide clues as to the possible interest rate rise. They will either be in or out because the summer months are approaching – and this decision will be critical relative to the price of gold.
Silver followed gold lower – down $0.66 at $17.05. The close today of $17.05 is still above silver’s important moving averages. The 50 Day Silver Moving Average ($16.46) – the 100 Day Silver Moving Average ($16.65) and the 200 Day Silver Moving Average ($16.98).
Platinum closed down $27.00 at $1150.00 and palladium closed down $18.00 at $775.00.
This from the Wall Street Journal (Josie Cox) – Euro Slumps After Official Says ECB Will Front-Load Stimulus – European Central Bank could launch greater-than-expected stimulus in May and June – “The euro fell hard against the U.S. dollar Tuesday, while European stocks and bonds surged on the prospect of the European Central Bank ramping up its asset-purchase program in May and June.
By midafternoon, the euro was down 1.5% against the buck on the day at just over $1.11, after the ECB published comments delivered by board member Benoît Coeuré saying the central bank would moderately front-load purchases in its bond-buying program in anticipation of less market liquidity in the summer.
The central bank would be able to keep its monthly average of €60 billion ($68.35 billion) in purchases, “while having to buy less in the holiday period,” Mr. Coeuré said.
Benoit Coeuré attends a session during the World Economic Forum annual meeting in January. Markets moved after he said the ECB would front-load purchases in its bond-buying program.
“Even though this is just front-loading, it is effectively an increase in the size of quantitative easing, even if just for a short period of time,” said Simon Derrick, a currency strategist at BNY Mellon.
“It shows that within the existing framework, the ECB is willing and able to be incredibly flexible,” Mr. Derrick said.
The ECB’s asset purchases have driven up the price of bonds this year. Under the program, the central bank effectively prints fresh euros to buy government debt, which has driven down the value of the currency. Lower bond yields have pushed investors into riskier asset classes such as stocks in pursuit of higher returns. Yields fall as prices rise.
Tuesday’s market reaction echoes some of the moves seen after the ECB first announced QE in January, and when bond-buying began in March.
By midafternoon, the yield on the 10-year German bond was 0.025 percentage point lower on the day at just above 0.62%. The yields on Spanish and Italian 10-year bonds were 0.07 and 0.08 percentage point lower at 1.78% and 1.84%, respectively.
Separately on Tuesday, Christian Noyer, the head of France’s central bank and a member of the ECB governing council, said the ECB was ready to go further if needed to meet its inflation target.
“The purchase program will continue until the end of September 2016 and beyond if we do not see a sustained adjustment in the path of inflation,” he said.
Iain Stealey, a fixed-income portfolio manager at J.P. Morgan Asset Management, which has around $1.7 trillion in funds globally, said that the comments would “push back against any suspicions that the ECB might think about tapering its asset-purchase program early” in light of encouraging eurozone economic data.
In equity markets, the euro’s slump sent the Stoxx Europe 600 up by close to 1.4% by midafternoon, with Germany’s DAX—packed full of major exporters that benefit from a weak euro—leading the pack for a second consecutive day with a 1.7% rise. On Wall Street, the S&P 500 index edged marginally lower.
London’s FTSE was 0.3% higher even though data showed Tuesday that consumer prices in the U.K. fell in April compared with a year earlier for the first time in more than half a century.
Ian Stewart, chief economist at Deloitte, said that the move would likely prove short-lived and would actually be positive for growth.
“Falling prices raise consumer spending power and help keep interest rates low,” he said. Sterling was trading roughly 1.3% lower against the dollar by early afternoon.
This from FX Empire – EUR/USD Spikes – Lone Fed Wolf Looks for Inflation Above 2% – “The EUR/USD has risen 9.1% since the European Central Bank started its quantitative easing program in March, hitting a 3-month high of 1.1451 this morning. Over the same period, the US dollar has lost more than 10% of its value. The USD decline has accelerated over the last several weeks as the second quarter economic upturn predicted by US Federal Reserve Chairperson Janet Yellen has failed to materialize.
Concomitantly, Federal Open Market Committee members have gone silent on the date of a proposed rate hike, initially expected in June and then pushed to September. An FOMC member has finally spoken out this morning on the lingering zero US federal funds rate and changed course dramatically, although his view is far from the consensus view.
Speaking in Stockholm this morning, Federal Reserve Bank of Chicago President Charles Evans has put more wind behind the sails of a low dollar by pushing the possibility of US quantitative easing into 2016. In a reversal of the Federal Reserve line on inflation in recent years, Evans has suggested letting inflation run past the 2% target. The inflation rate has been negative in 2015. The idea is to loosen the reign on monetary intervention and give the economy more room to grow.
High Volume – Volatility in the EUR/USD has remained high since disappointing US retail sales were reported on May 13th. A smooth ride up today to 1.15, though, is not likely to happen. Evans is known as a lone wolf on his inflation position but in the absence of chatty Fed colleagues, his inflation views are receiving more attention.
Instead, the prospect of more dollar weakness has sent more shorts covering long positions. As US traders come online, expect more volatility at least until lunch time. Notably, the short covering is creating only minor resistance under 1.140.
Just before the US market open, the 50-day moving average is touching the upper Bollinger Band. This could signal a sharp move downwards, or a move higher on low resistance, but it is early in the day for a bold move. The price should fall below the upper Bollinger Band as the US market becomes active. More short covering on the day’s news is likely, but then a resistance level of 1.15 is on the horizon, a level not reached since January.
The Chicago Fed chairman has hinted that inflation targets are now a psychological game. Failure to lift inflation to 2% levels will undermine the public’s confidence in the Fed, he says. Indeed, EUR/USD traders are now indicating a loss of confidence in a strong second quarter recovery. The current growth lag aside, Evans expects the US economy to grow 2.5%-3% over the next few years.”
The walk-in cash trade today was slow to steady and the phones were the same – typical action really on a down day.
The GoldDealer.com Unscientific Activity Scale is a “ 5” for Tuesday. The CNI Activity Scale takes into consideration volume and the hedge book: (last Wednesday – 5) (last Thursday – 4) (last Friday – 5) (Monday – 5). The scale (1 through 10) is a reliable way to understand our volume numbers. The Activity Scale is weighted and is not necessarily real time – meaning we could be busy and see a low number – or be slow and see a high number. This is true because of the way our computer runs what we call the “book”.
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