Metals Thoughts: Mandate death trap
Tuesday, March 28, 2017
For the second time in a month, gold has challenged and failed the downsloping 200 DMA, but this time having significantly more support from other macro inputs, DXY and rates particularly.
President Donald Trump seems to prefer personal experience to observed wisdom by undertaking the Sisyphean task of healthcare reform, only to be chased down the hill by the rock. The loss has many punters doubting the strength of his mandate for reform and considering the many factions within the GOP to perhaps be more formidable than prior thought.
We'll see whether this administration can regain some of the momentum on tax reform, infrastructure spending and the like, but this is starting feel like Abe's three arrows.
- Tons of Fed speeches this week gives them ample opportunity to remind everyone of the nuance involved in a "dovish hike" cycle. Charles Evans went so far as to say that two hikes (just one more) may be appropriate.
- Option expiry at close today can always inject some fun into markets. Most OI concentrates in calls for $1,400, $1,300 and $1,225, so a break of the $1,260 level to $1,270 could get some additional fuel just in case.
- I've seen anecdotes of Indian gold demand outperforming in February, perhaps some mean reversion after the initial shock from the cash controls?
- Financial Conditions Index actually shows overall more accommodative policy in March than anytime back to June 2015. That's the effect of a dovish hike: only nominal rates move higher, not real.
- Gold ETFs have plenty of room for new additional purchases.
- A further move lower in equities may have traders looking to lock in gains and rotate into something else.
- General macro landscape seems to have everyone bullish gold but with low conviction, so could be quick to chase returns should we breakout.
- 200 DMA at $1,261 has already failed once in February, will take some serious momentum or new buyers to spook sellers away from the level.
- Silver CFTC positioning still a bit long vs. averages, which may cause a lack of follow-through in further upside from gold.
- Physical demand still overall tepid, particularly in domestic retail investment product.
- We are in a rate hike cycle and equities are only 3 percent off the all-time highs, hard to argue for safe havens to the average investor.
- 10-year real yields are positive, if only slightly.
- Angela Merkel's surprise win in Saarland shows not everyone in Europe is going populist.
- We've been rallying off the $1,200 lows for nearly two straight weeks now, and the 14-day RSI accordingly is showing almost overbought at 66.
- USD selloff overcooked?
The "Trump rally" isn't so clear. Compare the rallies of SPX, FTSE, DAX and Nikkei, all normalized to U.S. election day (vertical line). The Nikkei and DAX have both outperformed the S&P 500 by 6 percent and 2 percent respectively.
It's more about overall expectations about accommodative monetary and potentially fiscal policy than any one personality, but why let evidence get in the way of a good narrative? Gold is the lagging yellow line for relative performance comparison.
Perhaps there is potential value in holding assets in the face of a lack of real earnings growth?
Going back to the beginning of 2015, you can visually see the importance of gold (white candles) breaking the 200 DMA (yellow line) to the upside. Failed breakouts contribute to further downside momentum, whereas clear breaks like in February of 2016, can make room for significant moves higher.
You can see where we tested and failed last month and how we currently sit right below the same level. The DXY (orange, inverted) and two-year rates (blue, inverted) are providing some mixed signals, with dollar having sold off significantly, but short rates remaining slightly elevated in the wake of the "dovish hike" last week.
The dollar has been such a crowded trade for such a long time that it's not surprising to see a painful reversion, but 3 percent is significant.
Until we break the 200 DMA, short-vol strategies seems to be empowered to sell with both hands, and we are seeing implieds get hit a little bit this morning. Given the recent weakness in DXY and some change in confidence for the macro outlook, it seems like the risk-weighted outcome odds are for a break, so we'll call for upside. Higher.
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