Gold Prices Poised to Test Higher Levels
Gold prices edged higher and remained buoyed in the face of a relatively strong dollar. The dollar continues to benefit from interest rate differentials that are moving in its favor relative to German and Japanese rates. Better than expected economic data along with demand for equities is driving capital flows toward riskier currencies helping gold gain traction.
There were a number of key economic releases on Tuesday that helped gold prices remain buoyed. The easing cycle may not be over, but the RBA shows no urgency to resume cutting rates. Although the current futures market has a least one rate cut implied in its term structure, easing has now been pushed out, driving up the price of the AUD/USD.
UK consumer inflation was in line with expectations printing at 0.7% month over month and 2.8% year over year, though producer prices rose more the expected 3.2% month over month and 2.5% year over year warning of potential squeeze on margins. The German ZEW survey showed improvement especially in the assessment of the current situation 13.6 from 5.2 the prior month. The euro responded positively to the headline which helped gold hold its ground.
The gold interest rate differential is also favoring gold prices which could generate tailwinds for the yellow metal. The gold interest rate is calculated from the gold forward curve which is a market made interest rate similar to sovereign interest rates. The differential is calculated by subtracting US sovereign short term interest rates from gold forward interest rates. As the interest rate moves in favor of a currency like gold, it becomes more beneficial to hold gold over dollars generating more demand for the yellow metal.
The Reserve Bank of India cut its policy rates by 25 basis points on Tuesday to 7.50%, as expected. Recent data including Industrial Production and Consumer Prices have come in on the high side, but the overall softness in the economy is likely to persist for India. The central bank might find it harder to continue cutting given the combination of a high current account deficit, higher inflation and greater uncertainty regarding the likelihood of further reforms and fiscal consolidation. In the meantime, the dovish move helps gold prices, as looser rates generate more liquidity and a higher demand for hard assets such as gold.
Gold prices are edging higher after forming a base that is a cup and handle pattern. A close above resistance near 1620 would likely lead to a test of the downward sloping trend line that comes in near 1,650. In this instance, going short with a spread bet or options trade might be advisable. The 5-day moving average crossed above the 20-day moving average recently which is a signal that a short term trend in now in place.
Momentum on gold prices is increasing with the MACD (moving average converge divergence index) generating a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The RSI (relative strength index) is moving higher but printing near 53 which is in the middle of the neutral range.
