Tuesday, March 1, 2016
February was a strong month for Gold futures, marking the best month for the metal since January 2012. Gold futures gained 10.5% in February. The metal also saw high volatility in the month, as measured by CBOE/COMEX Gold Volatility Index (GVX). The index jumped 32% in February and volatility could remain high for the foreseeable future. There is economic uncertainty in the US and Europe, as well as China, so Gold could remain an attractive safe haven asset for the foreseeable future.
Investors have been flocking to Gold as an investment, as evidenced by the jump in holdings in the SPDR Gold Shares (GLD) ETF. The world's largest exchange-traded product backed by Gold saw an increase of 16% in holdings for the month of February, finishing the month at 777.27 metric tons of the metal. GLD has brought in an estimated $4.55 billion in new money this year. Investors have good reason to be fearful about the global economy. In the US, conditions seem to be weakening. The Chicago PMI saw a sub-50 reading last week, indicating contraction. With the economy adding jobs at a slower pace since October, there are some concern that the economy could be heading toward a recession. This could change the interest rate outlook for the Fed and result in rates staying static for the foreseeable future. This could hurt the US Dollar versus the other major currencies.
Europe is also facing its challenges. While the ECB is mildly pleased at some of the economic improvements due to the central bank's loose monetary policy, growth is still lackluster. Some ECB members have also showed concern that the bank's monetary policy could lead to inflationary pressure that may be difficult to tame. The 800-pound gorilla in the room for the EU is the possibility that Great Britain will exit the union (Brexit). This could have a negative impact on the Euro and Pound, as well as lead to contagion, with other member states attempting to seek more favorable terms with the union.
Looking East, China has had its fair share of challenges over the past several years in real estate and manufacturing. The People's Bank has had a difficult time stimulating economic activity with aggressive action. Like in Europe, there are concerns that the prolonged period of cheap money will eventually kick start the economy and create an inflationary situation that is difficult to tame. The Shanghai stock market is still a mess and there has been a leadership change there to try to restore some order and confidence. The Bank of Japan continues to use aggressive stimulus, going to negative interest rates. The threat of runaway inflation in Japan is, however, seen as lower than the aforementioned areas.
Turning to the chart, we see the April Gold contract continuing to consolidate in recent sessions. The consolidation has been tightening, leading to a triangle pattern on the daily chart. An upward breakout from the formation may suggest that prices could test the 1300 mark. The next resistance level may be found around the 1292.50 mark, followed by more significant resistance just below 1400. On the downside, support may be found around 1160 and 1100. It is interesting to note that the RSI indicator has been moving lower over the past two week, even as prices have remained sideways.
Rob Kurzatkowski, Senior Commodity Analyst