Gold has predictably fallen this week in the wake of some hawkish statements from various Federal Reserve members, as well as the central banks April minutes. But the dip near $1,255 on Thursday represents another buying opportunity before the gold bull resumes its march higher. Heres why:
Although the Fed minutes were interpreted as a firm signal that an interest-rate increase is coming this summer, a quick reading reveals that the Chairwoman Janet Yellen and company are just up to their same-old same old in other words, wait-and-see nonaction papered over with tough talk.
Fed still weighing incoming data: Members generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision based on how the incoming data and developments shaped their outlook for the labor market and inflation as well as their evolving assessments of the balance of risks around that outlook, the minutes read.
Taking the statement at face value, the minutes do not suggest that an increase in rates next month is a done deal it is the same old data dependent Fed trying to have it both ways, wrote Komal Sri-Kumar of Sri-Kumar Global Strategies.
Brexit vote gives Fed an out not to hike: Frankly, there are too many land mines ahead to allow the Fed to act. Just days after the banks June 14-15 meeting, voters in the United Kingdom decide in a June 23 referendum whether to leave the European Union in a Brexit. At present, the likely result is too close to call. Thus, if the Fed raised rates and thus strengthened the U.S. dollar, it would be doing so without clarity on the Brexit situation with potentially volatile effects on global markets.
Moreover, the Fed is unlikely to raise rates at a meeting that is unaccompanied by a subsequent press conference from Chairwoman Janet Yellen to explain the policy decision and soothe rattled markets. Such a conference is scheduled for just after the June meeting, but there isnt one after the July meeting, so that also lessens the likelihood of a rate hike then, unless Yellen were to conduct one spontaneously.
U.S. election to keep rate hike at bay: The next post-meeting press conference doesnt occur until September. But by that time, the campaigning for the U.S. presidential election will be in full frenzy, and the Fed dares not raise rates unless it risk being accused of interfering in politics. The Nov. 1-2 meeting on the eve of the election therefore also is out. That leaves us with the Dec. 13-14 meeting for the Feds final opportunity in 2016.
So gold investors shouldnt buy into the Feds bluster, but rather should see this rhetoric-induced gold-price weakness as a chance to buy bullion.
Gold under pressure from shorts: A couple of other factors also could keep gold prices from resuming their ascent for the time being. For one, according to Gold Newsletter publisher Brien Lundin, there is massive net short position by the large commercial category of paper gold traders, recent futures data show.
These traders are aligned with gold miners and refiners who hedge positions in order to lessen overall risk. Lundin sees the chance for a significant correction in the price at some point over the next month or so.
Cycle lows could spark big uptrend: Conversely, if some unexpected event transpires thats negative for equity markets, gold could benefit through short covering. However, if some event or economic data point sparks a spike in gold and forces these commercials to cover their shorts, we could see a major rally emerge, Lundin said.
And in a separate analysis, noted technician Tom McClellan sees the potential for gold to hit a cyclical low later this year. However, that could be short-term pain for longer-term gain. We should expect a big uptrend to commence out of that major cycle bottom, he wrote. It will be hard for gold bugs to be patient and wait for that major cycle low to arrive, but the long-term cycles say that the ensuing rally should be worth the wait.
Gold now in seasonally weak period: Morever, gold is just entering its historically weak seasonal period, which begins in late spring and continues until the fall. Since gold began trading freely in the U.S. in the early 1970s, bullion has produced an annualized return of only 1.2% in the March-August period, versus 13.4% in the other six months of the year, observed Mark Hulbert at MarketWatch.
Demand usually picks up once the summertime lull is over and Indias gold-buying festival and wedding seasons begin, running from October to December. Thus, while soft prices could lie ahead, experienced gold investors know that this temporary situation offers a strategic buying opportunity.
If I werent already long gold, Id be buying on this dip as I dont see it falling much lower, Adam Koos of Libertas Wealth Management Group told MarketWatch.
Fundamentals still favor gold: And as Altavest chief Michael Armbruster reminds us, the global backdrop for gold remains bullish, with negative interest rates from Japan to Europe being a game changer for gold. Beyond interest rates, currencies around the world are being devalued via central bank policy. Chinas currency is still overvalued and likely to weaken further, he said. So, the picture really doesnt change for gold unless the Fed hikes rates more than 100 basis points from here.
And dont look now, but the major U.S. stock indexes are again in negative territory for the year at this latest rate-hike threat. As we saw earlier this year in the wake of the Feds December rate increase, such hikes can actually be good for gold because they divert investment capital from stocks and drive it into the safe haven of gold.
So, the message to take away from this weeks Fed news is:
- Although the Fed could raise rates in June, its unlikely because of the Brexit vote. And if it doesnt act in June, chances are it wont until at least December because of the presidential election.
- The weakness were seeing in gold is at least partly because of annual seasonal trends, and history tells us that gold almost always recovers by the fall.
Keep in mind, too, that despite the latest dip, gold is still up roughly 20% on the year. For the savvy gold investor, the recent pullback is a chance to get in on the cheap.