Inflection Point for Gold - David Brady (18/10/2018)

Oct 18, 2018

After falling from 1369 to 1167 in just four months, Gold is attempting to rally now, having risen to a high of 1237 recently. But as I shared in my previous article: “There is significant resistance ahead that could stall Gold’s rally, most notably 1244, the 38.2% Fibonacci retracement of the entire drop from 1369 to 1167, and 1251 on a closing basis (1360-1184). If we close above the latter, then the bottom is likely in place and a truly historic rally has begun. There is plenty of upside from there.”

Many attribute the rally in Gold to the slump in U.S. stocks, but this is erroneous. If it were true, then why didn't Gold soar last Wednesday when the big drop in stocks occurred? Instead it rose just $1 that day. It soared Thursday on the announcement of a meeting between Trump and Xi at the G20 on November 30 and the U.S. Treasury’s decision to NOT label China a currency manipulator.

Furthermore, Stocks have risen back above 2800 since then, and yet Gold has not fallen significantly. Gold is still driven by the yuan, and the yuan is still determined by developments between the U.S. and China. This was further illustrated by the performances of XAU/CNY and USD/CNY last week, when Gold rose in dollar terms in response to the aforementioned announcements.

The sudden rise in Gold has everyone getting excited that the rally we have all been waiting for has finally begun. Perhaps it has, but I have my doubts. Have any of the problems that led to this point, such as the U.S.-China trade war, gone away? No. Could they get worse? Yes. China could further devalue the CNY, among other things. Consider this when you ponder the next direction for Gold.

In fact, following the announcements of the Trump-Xi meeting and China not being labeled a currency manipulator, the Chinese were expected to respond in a conciliatory manner by fixing the yuan at a higher rate, a lower USD/CNY. They did the opposite. USD/CNH (offshore USD/CNY) has only risen since those announcements were made and closed at its highest level since then yesterday.

The point is, despite public assurances from the Chinese that they would not devalue the yuan to promote exports, clearly they still could. They said that the rally in USD/CNY from 6.25 to 6.95 since April was due to “market forces”. Is it therefore not possible (but probable) that should USD/CNY rise above 7.00, they will blame such market forces yet again?

The only reason Gold is not much lower is Gold’s rise in CNY terms since the announcements last week. Why it jumped out of its 8050-8350 range is a subject for a future article, but it did, contributing to the rise in Gold in dollar terms. The problem is: it has stalled.

XAU/CNY reached a peak of 8530 but has gone sideways to down since. At the same time, USD/CNH is rising, which is once again putting pressure on Gold in dollar terms. If USD/CNH continues to rise and XAU/CNY doesn’t rise also, then Gold is going lower in dollar terms. Simple math.

Stepping back from the details and looking at the bigger picture: The U.S.-China trade war is clearly nowhere near being resolved yet. Trump has threatened 25% tariffs on all Chinese exports to the United States. The only reason they have not been implemented yet, in my opinion, is the midterm elections. Trump does not want to risk a backlash from businesses and consumers, especially in the Midwest, ahead of the elections. At the same time, China responded to the U.S. offer of a meeting in non-committal terms, and as mentioned earlier, they did not reciprocate the other olive branch last week from the U.S. Treasury and further devalued the yuan. Hence, I don’t believe anything will come out of the G20 meeting post the U.S. midterm elections. The trade war is more likely to escalate further, risking a USD/CNY above 7.00 and lower lows in Gold.

In the short-term, from a technical perspective, should Gold close above 1251, the 38.2% retracement of the decline from 1360 to 1184 on a closing basis, this would open up a move to 1272 and 1300 above there. By contrast, a close below 1219 would pave the way back to the previous lows.

From a long term perspective, I remain extremely bullish Gold and other precious metals. Both Poland and Hungary have joined several other countries, most notably China and Russia, in buying Gold recently. Hungary increased in Gold reserves by ten times. Poland made its biggest gold purchase since 1998.

Even more interesting is: why? Both cited safety and stability concerns. The comes at a time of accelerating global de-dollarization, which could ultimately undermine both the dollar’s role as the global reserve currency and confidence in all fiat currencies at the same time. Hence the need for Gold. My recommendation remains: “Follow the smart money” long term and buy Gold or other precious metals.

One final note on another precious metal, Platinum. Specifically, its positioning. Any time Other Reportables cut their long positions significantly and then start increasing them again, Platinum prices peak and fall. They have been cutting their long position since June, but that has accelerated recently.

If Other Reportables stop cutting and start increasing their long positioning, Platinum is likely to fall again, and lower lows are an increasing probability before the big rally begins. By contrast, if Other Reportables keep cutting their longs, Platinum should continue to rise. I share this because Gold, Silver, and Platinum tend to move in the same direction.