iGold

Since gold’s all-time high of $1,923 per ounce in September 2011, the nearly 6-year decline that this week has brought prices back to $1,270 has been broadly defined by a falling linear trend of selling pressure. This declining trend is being tested immediately, and a breakout higher would be a major signal that gold’s period of falling prices has come to an end. However, caution is warranted as leading indicators are still flashing warning signals for precious metals prices.

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Unfortunately for gold, we are living through one of those anomalous time periods in which the US dollar and precious metals are positively correlated – but to the downside.

Throughout history, gold tends to have its strongest moves when the US dollar is losing value, as gold receives bids from those looking to protect their savings against a decline in the world’s reserve currency.

However, as we can see at right, especially since the Federal Reserve meeting in mid-June, both the US dollar and gold have moved in the same direction: lower.

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On the heels of the Federal Reserve’s most recent ¼ point interest rate hike on Wednesday, gold and the precious metals complex have seen a negative bearish reversal that deserves caution over the short and intermediate term.

Fundamentally, the interest rate hike and accompanying policy statement, which indicated that the Fed would begin to taper down its balance sheet over the coming year, was interpreted by the market as supportive for the US dollar and negative for gold. As precious metals investors, we know that the Fed has already printed nearly $4 trillion dollar of fresh liquidity in support of the financial system over the past decade, and that the feasibility of the central bank reducing this liquidity by any significant amount is doubtful. Yet what is important over the short run is not so much our fundamental beliefs – but rather how the market itself is reacting.

For example, those who ignored the actual response of the gold market in 2011 suffered severe losses as the precious metals declined through late 2015. All the while, the Fed continued to print money. The market can move contrary to perceived fundamentals for many years. Caution is again advised at this juncture.

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US stocks are overvalued by several major valuation models, but is a top near?

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Gold prices remain in a mid-cycle consolidation after the strong advance seen in first-half 2016. Seasonal influences are shaping up for strength by August and September. The gold to silver ratio looks to have topped, signifying an important low across the sector. Precious metals investors should continue to monitor the ratio as a leading indicator, which will give us hints as to the direction of gold’s pending breakout when it occurs later this year.

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With France voting for Macron – and by default to remain in the EU – it is likely that fears of a European breakup have seen their worst over the intermediate timeframe. The dollar has received safe-haven status amidst euro fears over the past five years. Dollar strength has put downward pressure on precious metals.

A reversal higher in EUR/USD has begun. The last low in the euro (high in the dollar) of this magnitude marked the relative low in gold at $255 in 2001. Although diverse geopolitical and economic cross-currents will be impacting the gold market over the years to come, the importance of a 16-year cyclical high in the dollar (low in euro) as a backdrop should be at the forefront of long-term precious metals and commodity investors’ minds.

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