Gold’s Steady Three-Week Rally May Find Some Volatility

Gold’s Steady Three-Week Rally May Find Some Volatility

Fundamental Forecast for Gold: Neutral

• Gold deviates from risk trends, responds to signs of tempered financial risk
• After carving a steady bull trend through August, is gold close to forming a top?

In the past two weeks we have seen a sharp tumble in risk-based assets and then a moderate correction as congestion took over. However, through these meaningful shifts in the trading landscape, gold has maintained its steady and consistent bullish climb. Now, not three percent away from its record high, the commodity’s climb is requiring greater and greater levels of conviction. Can the market sustain such a measured pace with the speculative calls of an oversold market inevitably rising against a buy-and-hold crowd? Considering this particular asset holds a unique position in the global market – which often leads it to diverge from the rest of the speculative market that is moving in tandem – it can hold out. However, both trend and volatility will almost certainly be put to the test as underlying trading activity picks up into the week.

The greatest source for a market-wide shift in sentiment overing the coming days is the collective assessment of economic activity going forward. In one way or the other, most of the scheduled event risk due can be traced back to growth. The big ticket indicators are the revisisions of the US, German and UK 2Q GDP numbers. The US number contains the most potential energy. The official forecast is looking for a drop in the annualized pace of expansion from 2.4 to 1.4 percent. Within the market, there is a growing forecast for the number to actually cool to a sub-one percent clip. If that is the case, the world’s largest economy is one step away from falling back into recession well before the rest of the world has even shown signs of slowing. The German figure will be similarly market moving as the details will finally be released with the indicator and it will be far easier to gauge the underlying strength of the economy (and better gauge whether it will collapse heading into the second half of the year). Beyond GDP readings, we will likely see housing, confidence, manufacturing, retail sales and other brands of data all coming back to the big question of growth.

When we take a serious look at the dislocation of gold when it comes to correlations across the capital markets, we find that the commodity fills a unique position and thereby responds to a different brand of fundamentals. Risk aversion is not the primary driver for gold buying; it’s the breakdown in the financial workings of the global markets themselves. Will we see panic rise in the coming week? The probability of such a scenario occurring is low; but the risk associated to such an outcome is exceptionally high. Therefore, it is well worth our time to try and decipher what could generate such a concern. The concern that the global economy is on the verge of stalling is a potential catalyst. If growth stalls, austerity measures will likely fail and stimulus is already over-extended. The options would be severely limited. Aside from this macro event, we have to watch European and Chinese financials closely. Both have shown telltale signs of a potential crisis; and all we need is speculation to connect the dots for panic to spread. What happens should fear take over and the markets freeze up – gold quickly puts in for a new record high. - JK