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Gold Fights for Higher Ground

Gold Fights for Higher Ground

Commentary for Friday, February 14, 2020 – Gold closed up $7.60 today at $1582.70 in quiet trading. Yet our shiny friend is fighting its way back to recent 30-day highs around $1590.00 after the most recent selloff which approached $1550.00.

So, the technical bulls are happy but for my money this market is still dealing with an extended trading range between $1560.00 and $1590.00. Today’s surge to higher ground is most likely the result of the changing view that China’s coronavirus is dangerous, plain and simple and the previous conclusion that this human threat might fade was premature.

Keep in mind when this virus was first observed it was feared and gold safe-haven demand increased. But this initial reaction was discounted as the possibility of a world-wide pandemic was dismissed by medical professionals. Well unfortunately the fear factor has come roaring back over the latest grim statistics and speculation increases – founded or not.    

Now add to higher safe haven demand over this threat the yearly gold price picture, which is technically strong and gaining momentum in spite of a strong dollar.    

In the past 12 months gold has moved convincingly higher from $1300.00.

In the process it has threatened $1600.00 on two occasions. So, the longer-term and now shorter-term price picture favors the bullish scenario although there is a reasonable case to be made that the perceived threat from the corona virus will again dissipate.

But here is where the picture gets a bit cloudy. Technically the $1600.00 to $1800.00 range represents immense overhead resistance for gold which has been in place since 2012.

If you are a pessimist gold’s recent gains might suggest a round or two of profit taking are in order and you might be right. But as long as bargain hunters keep buying the dips and central banks keep interest rates near zero – we might yet see new record highs for gold in 2020.

And this is without the help of an inflation scenario. I will let you decide what gold might be worth when inflation returns, and I would take the over.  

A reminder that we will be closed this Monday for President’s Day – Banks, the post office and US commodity markets will also be closed.

This from Zaner (Chicago) – “Global equity markets overnight were mixed with the Shanghai markets surprisingly higher on the day perhaps because of aggressive Chinese government intervention. Global markets trading lower generally showed declines of less than 1%. On the other hand those markets trading positive were also posting very minimal gains. Economic data released today showed a decline in a Japanese the Tertiary industry Index for December that was a much smaller than expected decline. From Germany GDP for the 4th quarter was on expectations but 0.2% below the prior reading. From Switzerland import prices were flat on a month over month basis but were down 1% on a year-over-year basis. From Spain various price measures for the month of January came in on expectations and generally right on the prior month. From Italy there global trade balance for December showed a higher than expected surplus. Finally from the overall Euro zone their unemployment change showed a gain of 1% which matched the prior month but failed to meet expectations for a lower rate. Also from the euro zone GDP came in at 0.1% on expectations but below the prior quarter. The North American session will start out with January retail sales which are forecast to hold steady with December’s 0.3% reading. The January import price index is expected to have a sizable uptick from December’s reading while the January export price index is forecast to have a modest uptick from December’s reading. January industrial production is forecast to have a minimal uptick from December’s -0.3% reading while January capacity utilization is forecast to have a modest downtick from December’s 77.0% reading. December business inventories are expected to have a modest uptick from November’s -0.3% reading while a monthly private survey of February consumer sentiment is forecast to have a modest downtick from the previous 99.8 reading. Earnings announcements will include Enbridge, Newell Brands and Portland General Electric before the Wall Street opening.

Obviously the virus count continues to be the predominant driving force in many markets and while the overnight virus infection tally gained 5,090 yesterday in China and there is a disturbing and growing number of medical workers catching the infection (while trying to treat patients) the markets have remained calm. The gold trade was clearly expecting a replication and perhaps an acceleration of the startling jump in the previous days infection count in China. Gold and silver are capped by widespread expectations for the Chinese government to unleash massive stimulus which in turn is keeping the trade from factoring in a sharp increase in economic uncertainty. It should be noted that some traders think gold is catching its primary lift because of the massive stimulus efforts of the central banks with the safe haven theme a secondary force. In minimally supportive overnight developments the Indian gold jewelry industry is soliciting the government to reduce the import duty on gold and gold ETF’s saw the 17th straight day of inflows. In a another potentially supportive longer-term story Gold Fields has apparently decided not to divest itself of its only remaining South African mining asset because of a sudden improvement in performance at their last mine. While risk off psychology is in place early today we suspect it will regain momentum in the afternoon in preparation for the next Chinese infection count after the close today. We suspect the gold trade will see increased speculative buying late today by those looking to position for 3 days of market closure and the potential for something surprising to happen in that period. Given the potential for significant volatility, traders should consider the purchase of gold futures and the purchase of a March (11 days until expiration but that also cheapens the premium cost) at the money put. An alternative for those expecting the worsening virus case is the purchase of a Silver $18.10/$17.60 March bull call spread.

While this week’s action in palladium would seem to suggest it is mostly immune to the threat of significant auto catalyst demand losses from China, it is also possible that the market is looking at the strong likelihood of a historical annual deficit this year in the event that the coronavirus situation begins to show containment soon. However the palladium market was presented with a negative article on palladium from Bloomberg overnight, with estimates that Chinese auto sales could drop by 30% this month after a record decline of 22% in the prior month. While slowing auto sales are potentially a precursor to lower palladium purchases by China, the more important near term impact is the idling of Chinese car production facilities. In our opinion, the bull camp in palladium needs to see a somewhat limited duration shutdown of the Chinese economy or that 1 million ounces deficit projected by an industry official could be dramatically reduced. In fact Citigroup has projected a near term decline to $2100 an ounce. We suggest that longs bank profits or at least sell calls against their positions.

We don’t want to give off the impression that we have a solid opinion on where gold prices are headed, but the news of a sharp acceleration of the infection earlier this week, another noted jump overnight, spreading global containment, massive Chinese stimulus, new and quicker detection methods all would seem to project a major decision off the virus in the coming week. Because of the gold markets historic safe haven following and because the virus situation could offer a catch-up reaction after a long weekend plays out, traders who think the crisis will expand should consider long gold futures and long gold puts or consider a March silver bull call spread. However if you think the crisis might moderate buy March near to the money gold puts as they are less expensive because they have only 11 days until expiration.”

Silver closed up $0.12 at $17.72.

Platinum closed down $5.90 at $966.00 and palladium closed down $34.30 at $2338.60.

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