Thinking about Gold

5:56 AM

Gold Bull Fundamentals
I have been a Gold Bull for a while and that is because of the uncertainty in the market.
French elections, Netherlands Elections, Trump's Policies, Global Interest Rates, inflated stock prices, the EU breaking apart, China slowdown, rising interest rates, extremely levered economies


While it is likely that we are reaching the end of a monetary stimulus type economies. I do not think it will end completely. We have reached a point where we are simply "pushing on strings" as described by Ray Dalio.

Just to be clear, i think the US amongst other countries should default to relieve the tax burden, but I do not think anyone is going to so until Japan does so first.

Risks are high, but gold prices have plummeted from 1,400 to below 1,200 in over a year.

Why? There are many reasons, irrational exuberance, the chase for return, ETF rotations. Whatever the case may be, the risk in the system has remained unchanged or have even heightened. If this is so, then Gold has the potential to make a comeback.

Listening to Real Vision TV, many fund managers have also expressed tactical allocation to Gold at this point of time.

It is not outdated by the way, Gold is still used in the system as a means of exchange and a means of risk aversion. The agreement between Russia & China to create a Pseudo Bretton woods system is proof of this.


Things to watch for
What we should be looking at that can disprove this thesis is 3 factors.

1)       Global reduction of risk
Maybe Jean-Marie Le Pen is no longer in the running, EU is stable and US, China, Russia are all cooperating with the globe to ensure growth.

Monetary stimulus is further introduced to reduce risk and prop up asset prices

Anything that continues to fuel global irrationality.

2) US Dollar Strength
bringing Gold down to sub-1000 levels. This is possible as it is the reason why i am still in my AUSUSD trade. Simply, i think US dollar will strengthen for quite a while. But will it do so more than Gold can drop? Personally, I do not think so.

But I may be wrong. If the US Dollar index accelerates to the 13,000-level bringing Gold with it. I will be wrong.

3) Inflation
My previous thesis is inflation in the US economy should accelerate, but when and for how long? I think the BAT (Border Adjustment Tax) has to first be implemented before Prices will readjust itself. Else a stronger US dollar should introduce disinflation.

There is a paper called the Triffin dilemma, where a Princeton Professor stated that the needs for the world reserve currency is contrary to domestic policy interests. With Trump's famous inauguration speech, "AMERICA FIRST, AMERICA FIRST, AMERICA FIRST," I think protectionist policies will cause inflation to increase in the US. It must.

Gold is typically a hedge for inflation so this is positive for us. But if the BAT cannot be implemented or Trump cannot hold up his end of the bargain for other matters. It is possible to have a disinflation in the US economy.

Yellen though, has said that she would like to see inflation higher than 2% because it has been below that mark for so long.

Because the last 2 are very difficult to define and monitor, instead I must let the market give me some indication.

Fundamental Entry – Later Today.
The US Dollar strength has been fueled by the potential rate cut happening later today. If this continues to persist, we are looking at a lower Gold Price, if so, I will wait for another bottoming out. Else if dollar strength holds and Gold is held above 1,200 15-30 mins after the announcement but no more than 1,210 to preserve risk-reward.

Tomorrow morning is also a possible entry if there is too much confusion in the market.

 Technical Entry
Technical support remains at the last lower low at 1175, below that is the round 1100. For this trade, I will enter at 2% risk and stop loss at the 1175 levels.

If prices move lower than this, we have likely lost the upward trend so no point risking more. The next logical level is at 1,100. Instead, I will be looking for another retracement as I feel it seems more prudent.

Short term upside potential is all the way past 1275 levels. This represents a 1:3 Risk:Reward ratio. 

Although if we do past the daily 200SMA I think potential could be 1350 and beyond.


Sentiment

Both rate hikes in December 2015 & December 2016 has brought a gold rally, no reason why there will not be this time. Sentiment is thus on our side

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