Dovish Fed and ECB not enough to push Gold higher
09 May 2014
Dovish overtones from both the ECB and the Federal Reserve weren’t enough to give precious metals a leg up overnight, with gold trading in a very narrow range between USD $1296oz and USD $1284oz.
Whilst economic data was light on the ground overnight (initial jobless claims in the US beat expectations by falling to just 319,000) the focus was overwhelmingly on three of the worlds most important central banks, the ECB, the BoE and of course the Fed.
It was monetary decision day for the first two, and they both left rates unchanged at 0.25% (ECB) and 0.50% (BoE) respectively, broadly in line with market expectations.
What was more noteworthy was the ECB press conference, where ECB President Mario Draghi stated that he was very concerned about a strong EURO and low inflation, and that he “sees interest rates at present or lower levels for an extended period”.
More importantly, Draghi suggested that the governing council “is comfortable with acting next time”, which was taken to mean that the ECB will either be cutting rates further, or launching their own QE programme as early as next month. This caused the EUR to drop almost instantly.
The comments by Draghi have certainly raised the stakes for the ECB, with Deutsche Bank stating that (according to Zerohedge) “Now that the June meeting is explicitly going to be crucial, not doing anything next month would in our view completely shatter the ECB’s credibility”
In the US, continuing the dovish tone, Fed Chair Janet Yellen said interest rates are unlikely to rise unless the economy is strong. With housing rolling over and Q1 GDP just 0.1%, its hard to see the US economy as anything other than incredibly fragile, indicating we are years and years away from higher interest rates.
Back to precious metals and as regards gold, we’ve seen Volumes out of Asia solid if not spectacular, though the SGE premium (at $3-$4 over Loco London) is at its highest point in a while. Expect some support at around the 100DMA at just over USD $1280oz, though gains to the upside would appear limited for now too
When it comes to silver, the market is in a similarly difficult to read position. Paraphrasing a great report from MKS Capital’s Senior Precious Metal and FX Trader, Alex Thorndike; “It (silver) currently sits just above trend support dating back to June 2013 ($19.20) for the time being. The metal did fall below this briefly last week on a daily chart but Friday's rally saw the metal squeeze back through. More importantly xag is now approaching a major wedge formation. On the upper bound we have the downtrend line dating back to the April 2011 (from $49.80 peak) which intersects at around $20.25, as well as 100 dma ($20.16). On the lower bound we have the 2013 yearly low (and lowest overall print since the $49.80 peak) at $18.22. As it stands these two trend lines will intersect in June. A definitive break through either to the upside or downside should define the longer term outlook for the metal.”
This fits in neatly with our expectation that the entire precious metal complex is fast approaching a potential inflection point. We are either at or very close to the end of this cyclical bear market, or, should a deflationary shock eventuate in the next couple of months, there is a chance we see a final wash out in the complex before things turn around.
Have a great weekend