Market Report: Consolidation enters tenth week

Not yet having achieved a sense of direction, precious metals continued their consolidation, drifting lower into support levels.

After a mid-week rally, gold traded at $1314, down $13 on the week, and silver at $19.98, unchanged. Gold’s performance sees it hugging the 55-day moving average, which is a support level in the eyes of technical analysts. This is shown in the next chart.

While technical traders see this level as support, they are holding back to see which way the trading range will be resolved, with a possibility the gold price might drop to the next support level at the 200-day moving average. The bullion banks who are still very short on Comex will almost certainly encourage the view that gold will move down to that level.

Be that as it may, there has been a substantial and upsetting fall in Japanese Government bonds, inducing volatility into bonds and equities generally. The VIX, a measure of equity volatility based on the S&P 500 Index, rose from 13.8 last Friday to a mid-week high of 19, the highest it has been for three months. The summer period of low volatility for equities is over, with the S&P breaking lower.

Traders have returned to their desks this month to find the economic and interest rate outlook is as uncertain as ever. After recent attempts to prepare the market for a September rise in the Fed Funds Rate, from various officials’ statements the Fed appears to have backed off, leaving open the possibility it will raise rates in December instead. We will know the outcome of the September meeting this coming week on 20-21 September, after which Ms Yellen will hold her quarterly news conference.

Subject to next week’s FOMC meeting, it appears that interest rate uncertainty has abated for now, but economic uncertainty has increased. There is a two-way pull between deflationists and inflationists, reflected in the daily performance of the dollar. A faltering Japanese or Eurozone economy could lead to flows into the dollar, as international funds sell down the yen or euro respectively. The inflationist argument is for price inflation to increase with or without an improving economy, necessitating a rise in interest rates, likely to be sufficient to break the bond market.

Even though bullion markets are not prepared yet to do so, we must look through these uncertainties to judge the future direction for precious metal prices. And while acknowledging the inflation risk, market instability is likely to emanate outside the US from the Eurozone.

While the exact date has not yet been announced, next month there is due to be a vital referendum in Italy on constitutional reform, judged by some commentators to be as important as the Brexit referendum in the UK. The polls are neck and neck, and if it goes against the government, there will be a political crisis for Europe’s largest debtor. The EU is already in turmoil following Brexit, and an extra Italian dimension could well lead to international funds selling down the euro against the dollar. A break below EUR1.10 could trigger this outflow.

Meanwhile, domestic Eurozone investors are likely to increase their exposure to gold. Raising the possibility that both the dollar’s trade-weighted index and gold could rise at the same time. We shall see.

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