Fundamental Forecast for Gold: Bearish
Gold prices closed higher by more than 1.0% this week as the dollar came under pressure on renewed calls for further Fed easing. Concerns over sluggish growth in the labor market, prompted by last week’s disappointing NFP print, coupled with weaker than expected data out of China have fueled fears of a global economic slowdown with calls for additional quantitative easing propping up demand for gold as a store of wealth. However the advance is likely to be short lived as the encompassing structure of the broader decline in gold remains bearish.
Chinese data made headlines throughout the week starting with the March CPI print which came in above expectations at 3.6% y/y. Although concerns over a hard landing in China have been circulating for some time, investors took solace in the fact that the PBoC had room to ease should the economic conditions warrant. However with pace of price growth climbing from 3.2% y/y to 3.6% y/y, the central bank has limited scope to ease as inflationary pressures take root. Trade balance data a day later temporarily eased concerns after the print topped expectations, posting a surplus of 5.35B versus an expected deficit of 3.15B. A closer look at the data however showed a dramatic decline in imports which came in at just 5.3% y/y, down from a previous print of 39.6% y/y, while growth in exports topped expectations at 8.9% y/y. The week culminated with GDP data on Friday which missed expectations with a print of just 8.1% y/y. While consensus estimates had called for a read of 8.4%, whispers forecasts just one day ahead of the print circulated that the data could come in as strong as 9%. Needless to say, the print weighed heavily on broader market sentiment with the greenback recouping nearly all the week’s losses as investors jettisoned risk assets in favor of the perceived safety of the reserve currency.
As a major buyer of gold, look for prices to remain under pressure so long as Chinese concerns remain in focus with strength in the greenback likely to further weigh on dollar-denominated gold prices. While the dollar has remained rather sensitive to speculation regarding further Fed easing, inflation data out of the US on Friday saw calls for QE3 subside. Although the headline figures came in at expectations, core prices (ex food & energy) topped expectations with an uptick to 2.3% y/y, topping estimates that called for a hold at 2.2% y/y. With the stickiness in core prices continuing to top the 2% target set forth by the central bank back in January, the Fed will find it increasingly difficult to justify expanding the balance sheet as inflation concerns persist. As such, the dollar’s advance as seen in the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) off the pivotal 9900 support level may continue to gather pace.
Looking ahead to next week, investors will be closely eyeing the economic docket out of the US with retail sales, industrial production, and a host of housing data on tap. Should the data top expectations, look for the dollar to advance at the expense of the yellow metal as traders begin to discount further easing with added emphasis put on housing data as the sector continues to drag on the economy. On the other-hand, should data continue to disappoint, look for gold to remain well supported with a break above the April high shifting our focus higher.
From a technical standpoint, gold has continued to trade within the confines of a well-defined descending channel formation dating back to March 1st with the yellow metal rebounding sharply off channel resistance on Friday. The bearish tone on gold prevails so long as the April highs at 1683 are respected with the sheer magnitude of the pullback on Friday further validating the encompassing structure of the decline. Interim support now rests with the 38.2% Fibonacci extension taken from the February 29th and March 27th crests at 1635 and the April low at 1612 with our medium-term objective eyed at the confluence of long-term channel support dating back to the 2010 and December 2011lows and the 61.8% extension at 1596. Topside advances remain capped by channel support with only a breach above the monthly high at 1683 negating our interim bias. - MB