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The precious yellow metal (gold) prices today continued its bearish streaks extending a one-year low at $1,214.06 levels, as the dollar steady on Federal Reserve Chairman Jerome Powell's US economic outlook reinforced standpoints that the central bank is on track to steadily hike interest rates.
The announcement by the US Treasury that it would move forward with plans to impose 10% tariffs on $200 bln worth of Chinese imports later this summer triggered a sharp sell-off in the markets directly in the firing line. While metals have especially taken a beating in the past month, registering double-digit losses.
Expectations for higher rates tend to be bearish for gold, which struggles to contend with yield-bearing assets when rates hike.
While the bullish stance on bullion market (especially gold) is essentially a leveraged bet on the weakening dollar — an upside option with the limited downside that we trust is highly likely to move into the money. Based on our historical analysis, in the unlikely event the dollar rallies through the late cycle (only 1 out of the last 6 cycles), the resulting gold losses were relatively tame (8%).
However, on the flip side, over the five cycles when the dollar weakened over the last quartile of expansion, gold prices increased over 40% on average even before the subsequent recession dynamics pushed prices even higher. To us, this looks like a relatively cheap upside option. The downside scenario looks both relatively unlikely on a historical basis and has only returned moderate losses when it did come about in the 1991 cycle.
Alternatively, the more likely upside scenario for gold has returned multiples of this potential loss. Recent shifts in macro momentum (the Euro area EASI is now positive for the first time since February) has bolstered our FX base case for a weakening USD and also strengthened our confidence in a rebound in gold prices.
Initiated longs in CME gold contracts for Dec’18 delivery in June. Added an equivalent unit at $1,315/oz in March for a new entry level of $1,339.90/oz as we expect bullish price risks.
The trade target is $1,540/oz while we have lowered our stop to $1,250/oz.
Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 139 levels (which is bullish) while articulating at (11:49 GMT). For more details on the index, please refer below weblink:
