Bullish And Bearish Forces In The Gold Market

The strong U.S. dollar has pressured precious metals since last summer. Also, the talk of interest rate hikes by the Fed is said to have negatively influenced gold. We have explained previously that we hold an alternate view on the relationship between interest rates and gold, as detailed in “What Is Really Driving Gold.” Our opinion is that the inverse relationship between interest rates and the price of gold is primarily a narrative, rather than a fundamental market dynamic, because rising rates are likely to mark a new rate cycle and a new economic cycle.

A standout feature this week, negatively impacting precious metals, is the latest COT report (Commitment of Traders), which reveals the positions of large traders in the gold and silver futures markets. This week’s COT report, for positions at the close of trade on Tuesday May 19th, shows a very strong accumulation of short positions by commercial traders, which indicates the capping power that can oppose this rally. It is no coincidence that gold’s recent rally was stopped this week. Do not expect a strong continuation of the rally in the very short term.

On the other hand, more gold-friendly factors include global monetary inflation and weakening currencies, which resulted in higher gold prices in those currencies. Moreover, we are seeing the first breakouts through long term declining trendlines in the precious metals complex. Charts can reveal extremely valuable information; the key is to identify the strongest trends on the charts, which is market trend analysis, in contrast to technical analysis.

From an intermarket perspective, gold appears to be preparing for a new trend. Our recent analysis shows that we should see new trends in the markets in the coming months, as featured on Financial Sense “Gold Is Nearing an Important Pivot Point in 7 Charts.”

The first half of 2015 was quite boring in most markets, but we expect a totally different picture in the second half of the year.

Gold could receive an assist from a very positive development this week. The CPI reading for April in the U.S. came in higher than expected. While the CPI stood at 0.0% in January of 2015, it increased to 0.2% in February and went up to 0.3 in April. That is the highest reading since the crash of the precious metals.

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