Higher Probability for Gold at the Peak

For forecasting the development of financial and commodity markets, not only quantitative but also technical analysis could be a valuable tool. Two weeks ago, we saw an analysis with the forecast that gold would reach a cyclical high at around 1,355$/oz in early March. This analysis was based on a study of price cycles and Elliott-Waves. On Monday, March 3, gold reached a high of 1,354$/oz and did not trade above this price during the remainder of the week. Also our further analysis, which is not based on technical analysis, comes to the conclusion that gold might have reached a peak.

The first argument is the divergence between gold and silver. Usually, silver is the more volatile of the two precious metals, but trades in the same direction as gold. But if silver moves in the same direction as gold and then reverses the trend, then it is a good harbinger that also gold might reverse the trend with a higher likelihood. While gold still managed to close above the last price of the week before, silver ended the week with a loss of 1.4%.

If a market does not rally on good news, then it is often a reliable indication that the rally has run its course. In the case of gold, the news was the development in the Ukraine, especially at the Crimea peninsula. The decision by the Russian parliament to permit a military intervention at the Crimea as well as the call of a referendum about the future of the autonomous region by the local government triggered sanctions by the USA and the EU. Russia announced that it might also reply with retaliations. It seems that Cold War is back after almost 25 years after the fall of the Berlin Wall. In such a situation, one would expect gold to be bought as a safe haven. However, gold showed only a modest reaction on Monday as equity markets around the globe fell and funds moved into commodities.

The ECB kept interest rates unchanged and also did not provide more liquidity at the ECB council meeting, while some analysts and traders expected further monetary easing. At the same time, the ECB lowered its forecast for the inflation rate in the Eurozone. In addition, ECB president Draghi declined to provide any guidance about the outlook for possible rate cuts. The euro strengthened against the US dollar, but this had hardly an impact on gold. A good news, which failed to push gold to a new high. A reason that gold could not rally on a firmer euro might be the expectation that ECB might just keep the powder try but take further easing measures rather sooner than later. The surprisingly strong drop of Eurozone producer prices points to downward risk for consumer prices.

It is not only the current development of producer and consumer prices, which point to further easing. The ECB might have to react also on political developments, which are out of her control and influence. Of course, this political factor is the crisis in the Ukraine and Crimea peninsula. Further sanctions by the EU and Russian retaliations could have a negative impact on the Eurozone economy and especially could push the Southern Eurozone economies back into recession. Thus, it appears only as a question of time until the ECB eases monetary policy again.

In the US, the Fed Beige Book provides further confirmation that the FOMC is very likely to stick to the path of reducing the volume of bond purchases at the next meeting. The weaker than expected economic data is regarded as the result of adverse weather conditions. Without any doubt, the weather played a role. The seasonal adjustment procedure (Census X-11 or X-12) are pure time series (ARIMA) techniques, which do not take into account external factors. Thus, one would have to wait until weather conditions are again back to normal for assessing whether the weakness of Q1 economic data was only driven by the weather or also reflect a weaker economy. Unfortunately, this might only be seen by summer. However, the February purchasing manager indices point to a still growing US economy. Therefore, the FOMC might have almost completed tapering until they have a clear picture about the strength of the US economy. Thus the US dollar might not provide much support for gold bulls.

Beside the technical analysis based on gold’s cyclical price behavior, also fundamental considerations indicate that gold might have reached a peak. But the big risk factor is the political risk. An escalation of the situation in Ukraine and the Crimea peninsula could lead to a sudden flight to the safe haven. Thus, it might be a bit too early to sell or go short in gold. However, investors holding gold might be well advised to tighten their stops.