Gold has been in a rally for much of this year but its direction going forward is closely linked to the action/inaction of the U.S Federal Reserve on interest rates. Analysts say that the stocks leveraged to gold and the metal itself will rally if the Fed doesn’t raise interest rates. This seems far more likely now that the yellow metals has started to lose its shine in the last couple of sessions after the April jobs report signaled stability in the U.S. economy.
Larry McDonald of Societe Generale says that buying gold and equity trading of gold mining companies is currently the best trade in the world. Gold continues its current trend of rallying amidst fears of an economic slowdown and downward slide. These fluctuations are more pronounced when the trend is moving upwards. For instance, the weak economic outlook in March had provided the bullion momentum to soar until it touched $1,303 an ounce last week.
Gold starts out with a weaker trend in May
Gold is currently on a downtrend, despite the bullish rally that pushed it to break out above the physiological barrier at $1,300 last week. This morning, spot gold was down 0.4% at $1,258.10 an ounce, after it had touched a previous low of $1,257.15, to mark its lowest price since April 28. The yellow metal was down 1.9% on Monday, to mark its single-day drop since March 23. U.S. gold for June delivery was down 0.5% at $1,261.10 an ounce.
Nonetheless, the current weakness in gold prices might be more of a function of sentiment rather than a change in the fundamentals of the yellow metal. Interestingly, the changes don’t appear as though they’ll have an effect in the short-term outlook or the long-term.
Let’s take a look at the price trends over the past few years:
source: https://www.bitgold.com/
Things seem as stable as they have been in the current year. The outlook continues to remain bearish with a few minor downgrades in price. The Stochastic indicator reveals the sell signal quite clearly; therefore, gold will remain within the declining trend channel.
The current year’s rally seems to be quite a major one, but these numbers do not even come close to past trends. For example, this year, gold hasn’t been able to cross the 38.2% Fibonacci retracement (decline measured from 2012- 2015).
This leads analysts to conclude that this year’s rally is simply a part of the self-correcting mechanisms of a larger downward trend. The short-term trend seems to have remained down as previously predicted. The rallying of the past few months has been nothing but short-term volatility. The fluctuations seem to have settled into a downward trend.
The major cause of this downward trend is that the long-term data shows a decline in value; also, the short-term support line was broken, which has been confirmed.Gold briefly fell to $1235 in March, recovered a little and currently stands at $1274. This rally again seems to be a short-term correction as stated before.
The price of gold shows the following trends:
http://gold-trading.forexth.com/images/gold-trading.jpg
Overall, the chart shows a clearly bearish trend for the medium term. There are a few small breakouts, but these don’t have much of an impact on the major trend. The most important thing to note is that gold clearly invalidated the breakout above the resistance lines. These long-term support lines were based on the 2005 and 2008 bottoms.
Silver remains relatively stable
The trends in silver don’t show much change. The closing prices of the week are usually the strongest signal of what to expect in the coming weeks. Last month, silver declined continuously, a breakdown below the moving averages of 10-week and 50-week was seen. The last time this happened, the price of silver declined and the implications were bearish. Silver is set to decline in the upcoming weeks.
Trend suggests buying on the dip for long-term investing
Mining stocks are also continuing on a stable trend. Mining companies are below the short-term resistance line. If this continues and we see a breakdown below the neck levels, then this bearish trend will become even more bearish. All signs point toward the fact that precious metals and mining stocks will be moving lower in the coming weeks. This is an excellent opportunity for long-term investors.
The current weakness in gold and silver presents a unique buying opportunity to investors because you’ll be getting into precious metals at a discount. The fundamentals that triggered the rally in gold this year are still in place and it would take more than a momentary pullback in the market to reverse market fundamentals. Until the Fed makes a decisive move to raise interest rates, the bullish trend for gold will remain intact with the occasional volatility that surfaces when economic data is released.
This sponsored post is written by Luis Aureliano, a business writer and financial analyst. With over 15 years of experience in global finance and an MBA in economics and management, Luis’s areas of expertise include business, marketing, communications, personal finance, macro economics, stocks and emerging markets.
