The monetary statements of the ECB this week demonstrated how unsure the markets are. Draghi unleashed another round of interest rate cuts, and increased asset purchases that went as far as to include investment grade non-bank debt, but when he commented that the interest rates would likely not be cut in the future, everyone headed for the exits. A move that made no sense and which was quickly taken advantage of by those looking to buy the dips. This further supports our position that the rally is not over just yet.
The CME FED Funds tool is still reading a very high probability (96.1%) of no change to interest rates, but the minority view has shifted from a small percentage for a hike, to a small percentage for a cut in interest rates (3.9%). We will see what the FED egos deliver on March 16th, but it is unlikely that they will move on interest rates until June, and then it would likely be an increase which will be damaging to gold. We are of the view that gold is headed down between now and the middle of the year.
The chart below compares the gold price with that of the 30 year US Bond. Notice how a divergence (green lines inside the circles) precedes a change in the direction of the gold price. In the most recent divergence, gold has risen, while the Bonds have fallen. This means either that gold will drop, or that Bonds will rise (i.e. lower interest rates), and since it is unlikely that rates will drop in the next six months, we hold that gold will trend down.
Gold has been down so long that any light that wonders into this market gets siezed upon and exagerated. This is simply hope, and we try not to invest based on hope.
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