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Gold Analysis (March 24, 2017)

| Swing Alpha on 7 Mar 2017 12:00 AM

In the previous week's analysis, I stated “Now that the interest-rate hike is over and we know that the FED is not planning to raise rates more than three times this year, we can expect that gold will soon attempt to break into the second range again at around $1250.48”

This week, it did exactly that. It rallied from $1229.15 up to a high of $1253.09 before falling back slightly. At the close on Friday, it was at $1247.81

So where is gold headed now? Let's look at the latest chart.


 

The yellow line is the 200-day simple moving average (SMA). The magenta line is the 100-day SMA. The blue line is 10-day exponential moving average (EMA). The red line is the 21-day EMA.

When the blue line crosses the red line from below, the price is in an uptrend. When the blue line crosses the red line from above, the price is in a downtrend.

Gold and The Obamacare Replacement Bill

On Friday morning, when the U.S. House of Representatives was expected to vote on the “Obamacare replacement” bill, many gold analysts were expecting the direction of the gold price to be determined by the outcome of the vote.

In order to understand why, we have to remember what caused the November gold price crash. Since Trump's election in November, many holders of gold-backed ETF shares such as GLD and IAU have sold their position. They felt that the stock market was going to rally...and they needed cash to buy these stocks. So selling their gold-backed shares seemed like an obvious decision.

Besides, they didn't see any reason to hedge against a fall in the stock-market. So why hold gold?

This caused ETF purchases of gold to fall in the fourth quarter by 338 tonnes according to the World Gold Council. As a result, gold sold off tremendously.

Gold has since rallied back. But this rally has occurred with almost no ETF buying...especially among U.S. investors.

So one could argue that if the bill fails, it implies that perhaps Trump is incapable of getting tax cuts or infrastructure spending passed. And if this is the case, it means that investors made a mistake in selling their gold and buying stocks this past November.

However, when the news came out Friday afternoon that the bill had been pulled from the floor, gold did not rally very much. This may be because the U.S. President was very careful to say that he would “move on to tax reform” if the bill failed.

Most investors never really cared if the health care bill passed or failed. What they cared about was what the failure of the bill might mean for tax reform. Since tax reform is still on the table, the stock market is not selling off and gold-backed ETF buying is not picking up.

However, gold investors that do not buy in the form of ETFs are still putting a bid under the price of gold. So the trend is still bullish...just not as bullish as many were expecting prior to the bill being pulled from the floor.

How to trade gold this coming week

Gold failed this week to break above the 200-SMA at around $1263. It is also sitting high above the 10-day EMA at $1235.32. This means there is a significant chance that it's going to fall in the next few days.

If it does fall, $1235.32 will represent a chance to go long. In this case, placing a stop at $1228.72 will yield a 2:1 risk/reward ratio with the top of the range at $1250.48 as the take-profit point.

If it falls enough to hit the 21-day EMA at $1229.66, this represents an even better chance to go long. In that case, a stop can be placed at $1223.08 for a 3:1 risk/reward ratio targeting the same take-profit point of $1250.48.

Of course, it might also just consolidate over the next few days until the 10-day EMA catches up with it. If this happens, you might want to just stay away from trading gold until it either breaks upward out of this range or pulls back.

Also, watch out for the final quarterly GDP numbers and unemployment claims data coming out on Thursday. If these numbers are bad, it could cause gold to break upward out of the range.


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3 Mar 2017 4:38 PM | Anonymous

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