Fundamental Crosswinds

August 15, 2014 - 5:33pm

 by Gary Wagner

itters began early over what might be revealed in the release of the FOMC meetings minutes.

That is the only explanation for the gold market's stubborn refusal to respond to the renewed fighting between Ukraine and Russia.

The situation in central Europe should be beating the haven seekers like native guides pushing big game toward hunters. We are at a loss as to explain the cold-blooded response by traders. Although we can offer this speculation: there have been so many flare ups and die downs that people are beginning to get the boy-who-cried-wolf syndrome.

Just wait a day or two, they tell themselves and those in the same game, and things will change again.

Indeed, within hours of a report by the Ukrainian government that it had bombarded Russian artillery pieces that tried to slip across the border between the two countries, Russia tamped down the rumor by calling it "a fantasy." We await the truth of the matter.

After hitting lows for the session around 1292, tensions "over there" pushed gold back up, though in late afternoon it is off its high for the day (1311). Some of the rebound is due to dollar strength.

Not surprisingly, Japanese and Swiss currencies plays, (as well as the dollar), are pulling the money in that fled equities.

"Risk has evaporated from the markets after the Ukraine headlines,'' said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "We have seen investors use the yen and Swiss franc as safe harbors.''

Crude oil also marched into the fray, picking up around 1.5% in price today. Energy still rocks and rolls the world.

That's about half the story. Another chapter is the continually unfolding saga of an enormous fall in physical buying in India and China, as well as the rest of south central and south eastern Asia. It's too expensive for people living in those places. Now we are on the verge of a new paradigm in physical buying in those countries. It may take five years before Indians and Chinese return to traditional buying habits.

Before wishing you a good weekend, etc., let's briefly turn to the FOMC minutes due out this coming Wednesday. The hawkish among analysts who scour the Fed's every word will no doubt see evidence that interest rates are about to be raised. Argue it any way you would like, but ponder these figures for the U.S. economy (these are projections).

The top-line Consumer Price Index (CPI) projected to rise 0.1% in July (2.0% year over year), with core CPI rising 0.2% (2.0% YoY). Oil prices have been flat for 45 days. Food is actually getting cheaper in real terms. Automobiles are priced about where they were in 2008. No inflation? No hike in rates.

As always, wishing you good trading,

Gary S. Wagner - Executive Producer

Sentiment Indicator:

Gold Forecast: Proper Action

We entered a long position in gold at 1294.30. Last week we trailed our stop to below 1300. Today's wild gyrations in the market took gold prices to an intraday low of approximately 1292. We were therefore stopped out of our current long trade with a small profit of approximately $4.00.

We remain flat over the weekend with no open positions in gold or silver.
 

Gold Market Forecast

Today's dramatic price decline highlights what light liquidity and low volume can do in a market on any given trading day. Whether we see this as an exaggeration of normal price activity or a realistic sense of what traders are able to do, although gold closed well above the lows they still managed to close off about eight dollars on the day. It is my sense that no long-term technical damage is evident from this recent price decline.

Today's intraday low of 1292 was approximately a 76% retracement of the most recent rally. How the market reacts as it opens next week will determine our next move. My sense is that with this type of one-day retracement if we see real support reenter the market, and gold prices hold above $1300 per ounce, it might be wise to reenter from the long side. In any case we have the weekend to review our charts, study the data and act upon our findings on Monday morning.