GOLD Capped in the Short-Term, But Pressure Building for a Breakout to the Upside - David Brady (09/05/2019)

May 09, 2019

Gold is clearly in a short-term downtrend and is being capped at the most recent high of ~1291.

This is despite falling real yields and interest rates… (courtesy of Quandl)

Falling USD/JPY…

Falling stocks (rising expectations of rate cuts and QE)…

Rising XAU/CNY…

So why isn’t Gold rising? There are two possible drivers. The first is our old friend, USD/CNH (offshore USD/CNY). This has been rising dramatically since Trump threatened new tariffs on Chinese exports to the U.S. ahead of trade talks scheduled for tomorrow. China responds by weakening the CNY, as it offsets the effect of new tariffs and they have few other tools to respond with, given that they export much more than they import from the United States.

Taking XAU/CNY and dividing it by USD/CNH, you get the following for Gold priced in dollar terms: 1280.

What this means is that unless we get a surprise trade deal or the Chinese execute a maxi one-off devaluation of the CNY overnight against the dollar and Gold, Gold will continue to come under pressure in dollar terms. How fast XAU/CNY rises relative to USD/CNH is also a factor.

See below an excerpt from an article I wrote back on July 27, 2018, on the effects of a maxi devaluation by the Chinese on Gold:

The second factor potentially capping Gold here is Bullion Bank selling of futures on the COMEX.

Gold closed at 1285 Tuesday, April 30. Open Interest in Gold futures on the COMEX was 430k. Gold closed at 1284 or basically unchanged yesterday following a rise of 33k in open interest to 463k and a jump of 13k yesterday alone. Such increases in open interest as Gold has repeatedly tested and failed to break 1291 resistance suggests the Bullion Banks are artificially suppressing the price by creating paper futures contracts at will and dumping them into the market. Hence the increase in open interest.

So in spite of the various factors supporting Gold prices, the trend remains down until a prior high is broken. That prior high is currently at 1291.

Looking beyond the short term, should stocks continue to fall, the likelihood of a Fed reversal in policy to rate cuts and QE increases, as does the peak and fall in the dollar. We saw this clearly in the price action of the DXY before the FOMC recently and today as stocks and yields fell. When expectations for a Fed rate cut and/or a return to QE increase, the dollar falls.

A Fed policy reversal and the subsequent peak and fall in the dollar has been and remains my primary scenario for the bottom and massive rally to follow in Gold.

Confirmation that trade talks have failed this weekend would certainly go a long way to making that scenario a reality. A maxi devaluation of the CNY in response to failed trade talks even more so.

Until then, the trend is your friend—or not, in the case of Gold, at least until 1291 is broken.