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Gold Back Below USD $1150oz as Greece Folds

17 July 2015

Gold prices eased again this week, falling below the USD $1150oz level, as easing tensions around a potential Greek exit from the Eurozone, plus a somewhat hawkish sounding Janet Yellen dented demand for precious metals.

AUD prices have held up better, with an ounce of gold currently trading just below AUD $1550oz, whilst silver is still holding above AUD $20oz.

Starting with Greece, we see a scenario where politicians in Athens signed off on a deal that is in many ways harsher than those which Greek voters recently rejected in the now utterly pointless referendum.

The bailout package, which could come to some 86 billion euros, still faces a few hurdles, not least of which is the question mark around funding from the IMF, who would be expected to contribute a portion of the required funds.

The Financial Times created a useful graphic discussing where the money is due to come from, and what it would likely be spent on, which I’ve included below.

IMF

There are a few things worth noting with this proposed package. Firstly, the idea that Italy and Spain (or France for that matter) are in a position to loan funds to Greece is laughable, for all of them face debt problems of their own.

Secondly, it’s clear that Greece itself can do little to contribute, with only a few billion set to come from privatisations and/or expected surpluses.

Finally, you can also see that the majority of the money will be spent repaying existing debts, recapitalising banks and making interest payments, with next to none of this money making its way into the real Greek economy.

As such, whilst the short term ‘event risk’ of a potential Greek exit has been minimised, the larger issues remain unresolved and unaddressed, with further volatility likely in the future.

In the United States, data was tepid at best, with the NFIB Business Optimism index falling, whilst retail sales came in at -0.3% for the month, a much worse result than the +0.3% that was forecast. Despite this, Fed Chair Janet Yellen sounded optimistic when discussing the outlook for the US economy with her superiors in Washington, and reiterated her expectations that interest rate hikes will be seen by late 2015 if the economy continues to evolve as expected.

We actually expect this interest rate hike, whenever it finally does come, to be supportive of gold prices, as the precious metal market has well and truly priced it in.

But in the meantime, uncertainty around the timing of the Fed move, and the market reaction to it will continue to hold back the sector. And with sentiment still extremely bearish, and speculators positioned for further falls, this period of weakness could continue for some time yet. The technical picture, which i've prepared with my colleague John Feeney, further reinforces this cautious view on the short term outlook for the market.

Lets Get Technical

The charts for US Gold and the AUD look very similar to what they have the last few weeks. It is a waiting game to see if this US $1,140 level will hold for a third time. As you can see on the chart below, the precious metal market bounced off this level in November 2014 and again in March of this year.

So there may be some buying around this level but we can't rule out the potential for gold to break through support on the third attempt. Gold took three attempts to break south of $1,180 the first time and I think three times a charm may be in order again here, as USD strength is not going to help.

If US gold were to break south of the trading range indicated below there is a good chance it will move back into the USD $1,000 to USD $1,100oz range, though how long that period of weakness lasts remains to be seen.

Gold

Turning to the USD, and based purely on the charts, it looks like momentum is about to swing, once again, to the upside. I have circled the MACD indicator below looking like the sell-off since the top may already be reversing and the 100 mark on the USD index may be in play.

The USD has seen some safe haven buying of late with what’s been happening in Greece and the like. Part of this is standard 'flight to safety' safe haven demand, though there is also an element of blind faith in the power and vision of the Fed, who most beleive are on top of all the forces impacting the US economy. We are not so certain, as we are several years into the recovery (weak though it has been), as well as several years into a period of rising asset markets, so economic and financial market weakness shouldn't come as a shock should it eventuate. It is also worth noting that the Fed has an absolutely terrible track record when it comes to economic forecasting.

Nonetheless the mainstream is sold on the omnipotence of the Fed, and a hawkish sounding Yellen this week was enough to bolster the USD, adding downward pressure to the gold price, and indeed the entire precious metal complex.

USD

Whilst there are undeniably worrying (if you are a bull) short-term technical indicators for USD gold, the negative outlook on the AUD must also be factored in.

There aren't too many economic fundamentals that we can see on the horizon for a higher AUD mid-term. And the technical outlook is bearish too.

We will see the odd bounce, but the smart money has long been positioned for a lower AUD. Indeed our primary concern with our negative outlook for the AUD is the fact that it is such a consensus opinion, that it almost has to be wrong.

But sometimes the crowd is right, and short term, the pacific peso looks weak on the charts. I have circled the MACD below only now just giving us a sell sign, so momentum could be to the downside for some time yet. We also broke major support at 75c, so we could easily see a 70c AUD in the future, possibly before the end of this year, which is a 5.4% drop from where we sit today.

AUD

The interplay between a lower USD gold price but a stable or higher AUD price for gold has been well documented in various ABC Bullion market updates this year.

We remain firm in our opinion that AUD Gold is unlikely to drop below AUD $1400oz, as a USD $1000z gold price coupled with an AUD at 0.70 places gold for local investors at AUD $1,428 an ounce.

With limited downside, dollar cost averaging and gradual accumulation still seems the best course of action.

Global Precious Metal Roundtable

Readers of our market updates will be aware that we host a regular global precious metal roundtable, which we host via Google plus. We typically invite a number of other precious metal analysts and professionals within the global gold community to discuss the latest events impacting the precious metal market.

Earlier this week we caught up with Mark O’Bryne from Gold Core, Ronald Stoeferle from Incrementum AG, and Bron Suchecki from the Perth Minth, to look at what has been happening in China and Greece, speculative positioning in the gold market, and why rising interest rates might actually be positive for gold. We also looked at softer demand out of Asia, an increase in retail coin demand in Europe, and the rising trend of gold investment by SMSFs in Australia.

Finally, we touched on some of the oversimplified narratives that seem to dominate any discussion around the subject of gold investing, and why, despite the present softness in USD gold prices, investors need not despair, and should instead focus on continued accumulation.

You can watch the video here.

Until Next Week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.

JE