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Speculators are still net long gold futures and gold ETF liquidation continues. These shifts are no longer at an early stage, and the “panic lows” of last month have survived their first test. Still, the combination of a rising dollar and firm global bond yields is not friendly to gold (and silver). The multi-decade relationship between the U.S. equity risk premium and gold prices points to further headwinds and reduced demand for “safe havens” like gold. The dollar outlook is complex, but what is clear is that the trade-weighted dollar has risen above the 84 level that offered resistance in mid-2012.
An extension of the current deflation scare would likely keep gold under pressure, given the Federal Reserve’s reluctance to extend quantitative easing any longer than absolutely necessary.
Overall, our recommendation to avoid bottom fishing gold and silver remains intact. Gold would stabilize in the $1,300-1,400/ounce zone if the dollar bottoms out.
This post was originally published by the BCA Research blog.