What Is The Message Sent By The Gold Chart?

by: SG PrivateWealthBanker

Summary

- Gold has broken the neckline of the downtrend for the first time in years.

- The recent performance recorded by Gold can be explain by the power of Gold ETF.

- Since these recent movements are in line to prior (in 2014 and 2015) January-February seasonal rallies.

- In the medium-term, Gold remains an out‐of‐favor investment strategy with asymmetric and dynamic potential.

What is the message sent by the Gold chart?

Gold had an incredible strong month of February, up 10% and the market has started to pay more attention to the ''Yellow Metal''. In 2016 year to date, bullion and the XAU Gold Index have risen 15.2% and 36.7%.
 
Source: Bloomberg.
 
 
Gold has broken the neckline of the downtrend for the first time in years.
 
What is it telling us?
  1. That policy makers will go deep into negative yield?
  2. That inflation is coming back?
  3. That the US$ about to sell off?




The recent performance recorded by Gold can be explain by the power of Gold ETF. Gold holdings of global Gold ETF's has risen 14.19% or 217 tons to 1,679 tons in 2016 as of February. 25th. By our estimates, this added 30% to normal global Gold demand year to date in 2016. To put this increase in perspective, the pace of buying for year-to-date 2016 is equal to 1,419 tons of Gold on an annualized basis.



Since these recent movements are in line to prior (in 2014 and 2015) January-February seasonal rallies and valuation levels are getting pricey, precious metal stocks may be due for a pullback in March.

In fact, New Year rallies tend to run out of steam by the end of the first quarter, with March being particular poor for Gold. Eight of the last eleven years have yielded negative returns for gold in March- the highest of any month. From mid-year to the end of the third quarter, increased demand from Indian wedding season tends to be supportive for Gold.




Therefore, while the chart send us an incredible bullish signal, we think that in the short-term, we may see a better opportunity to add position in the Yellow Metal.

In conclusion, the main message sent by the chart is that economic confidence and confidence in policy makers are faltering. The precise consequences (price inflation, ever crazier policies, cross-currency rates) are actually a side show.

However, we think that Gold is too shiny in the short-term, but the long- term trend is bullish.

In conclusion, Gold remains an out‐of‐favor investment strategy with asymmetric and dynamic potential for those who are concerned that the financial markets are overvalued. For those who see the US dollar as an overcrowded trade, Gold could represent a sensible hedge against a reversal. And for those who view the practice of extreme monetary policies by World central bankers as unsustainable and laden with potential adversity, meaningful exposure to Gold would now seem to be imperative.

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