Gold Puts Up A Week To Remember

Gold (NYSEARCA:GLD) had one of its best weeks on the YTD timeframe last week as geopolitical risks swelled and caused investors to trade into safe havens. After some resolve towards the end of the week, several key factors present themselves as bullish for gold. First, there’s the perpetually rising tensions with North Korea, with comments from Vice President Pence late last week showcasing that the United States will step in should nuclear capabilities and threats in the country continue to progress. Halfway around the world, the French elections are also beginning to weigh on the minds of traders, with a toss-up as to winners of the first round of voting. Gold may continue to rally this week if these geopolitical risks remain high.

Source: Time

Next Stop $1,300?

The question to answer is: will gold break $1,300/oz in the coming weeks? As I write this, in early Monday trading, we’re seeing gold tick up just over a dozen basis points. It’s now holding ground above its 200 DMA after quite the wild week of global affairs. In terms of GLD, it’s clear that nearly all of the post-election losses have been recovered in a drastic last couple of months of trading. GLD has been in a swift uptrend in the last four weeks, rising from $114 to $122. For an asset that yields nothing, gold is certainly providing an ample amount of value to investors at the moment. GLD is above its 50 and 200 DMA, however is overbought according to the RSI. It’s possible that momentum swings down over the next couple of days, but if global tensions remain high, and they very well could, this ETF could remain overbought.

Source: StockCharts

The VIX was the real story last week as it ticked up to its highest level in four months and held ground above 15 for a good part of the week. This is rooted in the military activity the United States has taken, with the launch of missiles at a Syrian airbase and the dropping of a massive non-nuclear bomb in Afghanistan, as well as the rising tensions with North Korea. In early trading right now, the VIX seems to be retracting just over a percent and it’s possible that if there aren’t any new major developments related to potential military actions this week, that the VIX will settle back down towards its 200 DMA. That would be negative for gold and is entirely possible considering that the VIX is overbought according to the RSI.

Source: StockCharts

It’s entirely possible that we see geopolitical tensions to remain high this week and push gold closer to that key $1,300/oz resistance level. The key risks to watch this week are the tensions with North Korea and the French elections. North Korea, in particular, has to be on the minds of traders. Last week, Vice President Pence visited the DMZ on the Korean peninsula and said the following:

Just in the past two weeks, the world witnessed the strength and resolve of our new president in actions taken in Syria and Afghanistan. North Korea would do well not to test his resolve or the strength of the armed forces of the United States in this region

Now that the current administration has shown that it won’t hold back in using military force to resolve conflicts, after launching tomahawk missiles at a Syrian airbase and dropping a MOAB in Afghanistan, this conflict could absolutely escalate. If tensions rise further, there’s clear support for gold as investors would want a higher degree of safety attached to their portfolios rather than not. If these tensions hang over the market, that would be continued support for gold and would allow futures to break that key $1,300/oz level.

Moving forward to another factor, the French elections are just under a week away from the first round of voting. There are four clear leaders, but eleven total candidates that the public can vote for. Some candidates are more market-friendly than others and if a non-market friendly candidate is elected, with the final round of voting being in May, then gold could see strength. Since there is no clear frontrunner at the moment, it’s difficult to assess what the impact on the markets the French elections could have. The uncertainty now provides slight support to gold, but we’ll have a better idea of the potential impacts on the market as the first round of voting ends later this week.

These escalating tensions add bullish support for gold. Additionally, one interesting statistic that came in late last week was the fall in CPI. This report showed the first decline in over a year, which is concerning considering the efforts the Federal Reserve has made to raise interest rates and the progress wages have made. Rather than dwell on the CPI numbers, let’s think about the impact on monetary policy and the potential impact on gold. First, the probabilities of a June rate hike may decline in light of this report, which means that a second rate hike this year may not come until September. The June rate hike has been on the table the past couple of weeks and now that progress could be slightly offset. For gold, in particular, it’s bullish because a lack of a strong CPI figure means that gold could potentially see some strength should if this at all begins to form a trend.

What’s The USD Doing?

Last week, President Trump made comments regarding the dollar’s relative strength, such that a strong dollar makes for a difficult economic basis. Right now, the dollar is trading at a three year high and seems to be in a somewhat prolonged trading range. In my article on gold last week, I said that gold would be looking to breakout of its trading below its 200 DMA, but that long-term economic factors were weighing on the minds of traders. However, those long-term factors were placed out of mind when the sheer volume of geopolitical risks warranted a surge in gold prices. The dollar looked as though it would rally, at the start of the week, however, reversed its trend around 101 and is now just holding ground above 100, just shy of its 200 DMA.

Source: StockCharts

It seems as though the downward channel that the dollar has put in to the start of the year has every reason to continue over the next couple of months. We’d need a significant change in current macroeconomics to warrant a breaking of this trend. I’d likely say the only factor that could cause a significant reversal is the presentation of tax reform to the floor and subsequent approval in a rather advanced timeline. Continual delays on key policy measures like this will only add more fuel to the downside fire for the USD. That means further strength for gold and GLD.

Another factor that could move the needle on the dollar is Q1 2017 earnings season. Companies have begun reporting and we’ll really be in the full swing of earnings season over the next couple of weeks. Expectations are high for YOY earnings growth, with estimates varying from 7-9% and if these expectations aren’t met, we could see futures trade down. We won’t know more until a larger body of companies have reported, but so far, the banks looked to be rather strong, with the exception of Wells Fargo (NYSE:WFC), with J.P. Morgan (NYSE:JPM) and Citi (NYSE:C) both posting earnings beats.

Conclusion

There are a multitude of geopolitical risks on the stable still and it is precisely this confluence of global risk that provides strong support to the gold, limiting short-term downside. The best thing that could happen for gold and GLD is that these risks hang over the global markets, with limited resolve over the coming weeks. That could directly undercut the dollar’s strength and could cause it to trend down further. Hedges seem all the more appropriate right now and while gold is overbought right now, the risks are plentiful and a long position is warranted.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GLD over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.