Gold Bounces Back on Safe Haven Demand, Fed

Gold bounces back, closes above $1,200.

Bullion.Directory precious metals analysis 6 January, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

Gold went bid yesterday (and now into the Asian trading session) on a few key  factors. Traders remain concerned about the overall economic climate going forward. Growth remains at a standstill, and the safe-haven demand trade was on big.

There were a few reasons why gold has seen a lot of action. The demand for the Japanese yen was sparked, as the Nikkei sheds almost 1,000 points since the December 23 high – down another 450 points tonight. Traders are loosing faith in Prime Minister Shinzo Abe’s economic policies.

Crude prices have also remained in focus. West Texas Intermediate (WTI) crude broke through $50 per barrel, while Brent crude fell through $54 per barrel. The pain is likely to continue. US shale producers are cutting rigs to 10-month lows (as they did leading into 2008), but supplies still remain at decade highs.

Iran and Russia continue to produce even with their economies in dire need for higher oil prices.

Saudi Arabia is the maestro in this whole scenario. Unless they give clues to when (if at all) production will be cut, prices will test the 2008 lows.

The narrative that cheap gas is good for the US economy is facile, and any transitory positives will be short lived. There is not even the global demand to consume stockpiles.

Please check out my correct forecasts on crude’s decent (here and here). In “Que 2008,” I likened the crude decent much like what we’ve seen six years ago.

Then, San Francisco Fed President Williams said there is “no reason whatsoever to rush tightening.” So, the motley bag of confusion still sits open at the Federal Reserve. It is unlikely the Fed will raise rates in early-to-mid 2015, even though Williams did not totally shut that option out. This helped get the S&P 500 started on its 37 point decline.

Nearly six years after the financial crisis, and the Federal Reserve still deems the US economy weak. They do not have to say it verbally because their policies do all the talking.

Infamous bond guru Bill Gross said “with the dollar strengthening and oil prices declining, it is hard to see even the Fed raising rates until late 2015, if at all.” Gross also pointed out what I have in the past. “It’s going to be very difficult for the Fed as the major central bank for the global reserve currency to raise interest rates.”

It will cause a great ripple in the financial system. The Fed, much like the Bank of Japan, has effectively closed themselves into a tiny box. Gross said that it is likely that rates would be capped at one to two percent, leaving bond yields relatively close to current levels. The benchmark US 10-year note is approaching two percent, while Jeff Gundlach believes if oil reaches $40 per barrel that the 10-year yield will see a one-handle.

In “Gold $1,200 – A Line in the Sand,” I spoke about gold forming a descending channel that was layered with support levels. Gold, initially, traded down to support in the lower-$1,170s before seeking a sharp climb through $1,200. Noticeably, gold saw volume spike while pushing through this near-term pivot, increasing about the 20-day average.

2015 will be interesting, for sure.

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