Thursday, May 15, 2014

No war in year four (so what’s next for gold)

Gold investors are wondering how much longer the metal will remain stuck in the mud as they await the next major “fear catalyst” that will launch a sustainable rally.  Gold futures have gone nowhere recently as traders assess the safe haven demand for the metal in the wake of recent economic reports from the U.S., China and Europe. 

Many investors wonder if perhaps volatile situation involving Russia and Ukraine will be the catalyst gold needs to launch a new bull market.  Adrian Ash, head of research at BullionVault, hit the nail on the head when he told MarketWatch: “Gold’s exposure to Ukraine looks asymmetric.  It’s not rising on the crisis, but might be vulnerable to a resolution.” 

Despite the efforts of mainstream media outlets to fan the flames of a Ukrainian showdown with Russia, however, the weight of evidence suggests the crisis has cooled considerably since last month.  See Time magazine’s latest cover below.

Even Time’s cover story by Michael Crowley and Simon Shuster admit that in the West, “there’s little appetite for harder-hitting measures” (i.e. economic sanctions) against Russia for its invasion of Ukraine.  Germany, for instance, is one of Russia’s main trading partners and according to the article, “Volkswagen, Adidas and Deutsche Bank are all opposed to broader sanctions.”  In other words, Big Money has prevailed against the war hawks in the U.S. who want to see another Cold War.  This is good news for Russia and the global economy, short-term at least, but it also represents one underpinning for gold’s appeal as a safe haven investment.

As we also looked at in a previous commentary, the Market Vectors Russia ETF (RSX), a proxy for Russia’s stock market, suggests that Russia won’t be a point of contention or a volatility factor in the immediate term.  As I wrote previously, “In contrast to the weakness displayed by the ETF in February and March, the RSX is on the mend and appears to be establishing an interim bottom.”  I also pointed out that if RSX manages to break out above its 10-week chart resistance at the 24.00 level it can only mean one thing: war has been forestalled for the foreseeable future.  While this would be good news for Ukraine, it’s not the news gold investors are looking for.

Another major factor which has underscored gold’s safe haven status in the past few months has been China.  Specifically, investors rotated into gold earlier this year when it looked like China’s economy was headed toward a recession.  Even now the economic data points to a soft Chinese domestic economy, with the China’s retail sales slipping to 11.9% in April compared with 12.2% in March.  Analysts have pointed out that gold has gained 7.5% in 2014 due to safe-haven demand in the West, partly thanks to China.  Yet even China’s stock market refuses to confirm the near-term weakness that analysts have forecast.  The China Large Cap ETF (FXI), a good proxy for China’s stock market, has established a short-term low at the 34.50 level and is still well above its March low of 32.50.  Unlike the economic statistics released by the government, FXI is forward-looking and seems to be reflecting a near-term scenario considerably less bearish than that of projected by the China bears.  This represents one less safe-haven support for the gold price.

Barring a resurgence of geopolitical and/or financial market volatility in the coming weeks, what could come to gold’s rescue and provide the catalyst for renewed demand?  Surprisingly, it might be nothing more than the simple yet sudden recognition among investors that gold is unloved and underappreciated.  In a note to its clients on Tuesday, UBS strategists Edel Tully and Joni Teves downgraded the bank’s one-month and three-month outlook for gold.  Yet they also suggested that diminished investor interest in the yellow metal would translate into gold putting in a short-term bottom.  The bank also expects gold to trade within a somewhat volatile trading range in the months ahead.

“Gold is not on the radar for many, and with broad expectations that prices will be range-bound this year, many investors are opting to stay out of this market,” said UBS.  “That is probably gold's biggest positive right now.”

It can’t be denied that investor interest in gold right now is at low ebb.  This means that gold will be sensitive to swift anything that might catalyze a short-covering rally or otherwise perk up value buying in a volatile market environment in the coming weeks.  Accordingly, a late spring or early summer rally can’t be ruled out for the yellow metal even without the sought-after “fear catalyst” which is necessary for a bigger, more sustainable uptrend.