Will Draghi Put a Rocket Under Gold?

Stock markets continue their winning streak.

After the worst yearly start in history, US stocks skyrocketed last week. Although still down for the year, it’s the third week in a row they’re up.

The US S&P 500, the large-cap benchmark, rose 2.7% to close the week at 1,999.99 points. The Dow Jones Industrial Average Index, the institutional money index, gained 2.2%. It closed the week at 17,006 points. The psychologically significant 17,000 level hasn’t been hit since early January.

Aussie shares leapt ahead.

Following the large mining sector bounce, the ASX 200 closed 4.3% higher. The benchmark index stands at 5,090 points — a two month high. Healthcare and utility stocks were the week’s worst performers. Financial stocks saw a short squeeze. And, after warnings of an imminent bounce last Tuesday, energy stocks were strong.

Fortescue Metals Group [FMG], meanwhile, finished the week nearly 25% stronger.

Of course, gold stocks continued to flourish.

But, what’s next?

I’ll explain…

When fundamentals don’t play out

To start, let’s review some news from the weekend.

Friday’s US non-farm payrolls number was a mind twister. I, like many other traders, stayed up late for the news. I didn’t have any expectations. But, assuming a stronger number, I told Resource Speculator reader’s that gold could get hit hard on Thursday. To understand why, I’ll give a bit of background.

If you didn’t know, the US Fed watches this number closely. Janet Yellen, US Fed Chairperson, became more dovish at her semi-annual testimony to the US Congress last month. Global stock markets were crashing, non-farm payrolls were weakening and inflation expectations were disappointing.

It was a major expectations change. Remember, just two months earlier, the US Fed was warning about four hikes in 2016. The US dollar crashed and gold ripped higher on the outlook change.

Needless to say, I though a stronger jobs number would wake up a hawkish Fed. With the US economy creating jobs, more rate rises could be back on table. Investorplace.com reported,

A better-than-expected payroll gain for February sent U.S. equities soaring on Friday, pushing the major indices back to levels not seen since early January and continuing the recent melt up off of the February lows. Payrolls expanded by 242k vs. the consensus for a 195k print and the upwardly revised 172k figure from January.

The report had a “goldilocks” quality to it: Strong enough to assuage fears of an economic slowdown in the United States but not hot enough to encourage rapid rate hikes from the Federal Reserve. While the labor market is tightening, new entrants into the workforce kept the unemployment rate stable at 4.9%. Moreover, wage gains were modest. All of this was exactly what the bulls were looking for.

Gold got smashed by roughly US$20 per ounce to US$1,250 per ounce on the news. The US dollar skyrocketed. And US equities futures rallied on bullish economic news.

Obviously, I wasn’t shocked by the initial reaction.

What happened an hour later was the surprise…

Gold surged by US$30 per ounce, hitting a weekly high of US$1,279.71. The US dollar got hammered and US equity futures got sold off.

I guess, ‘good news is bad news’ for punters. In this case, gold surged to an intra-day high for one reason: uncertainty rose. Punters became fearful of more rate rises.

When fundamentals don’t matter

It shouldn’t be a surprise. Remember, financial markets are cooked on money printing and lower interest rates.

Fundamentals don’t matter. In the days of the ‘new normal’, the only thing that matters is the next central bank move. Gold has thrived on the ‘wait and see’ approach by central bankers this year. Obviously, economic uncertainty has grown.

The reality of higher interest rates became clear later in the session. After hitting an intra-day high, gold closed lower at US$1,259 per ounce.

Looking forward, the weaker close could be a big deal for gold. In technical terms, gold’s move is a slight ‘reversal’. Meaning, the good days could be over. I guess, we will soon find out. Investorplace.com wrote:

All eyes are on the European Central Bank’s policy meeting on March 10 for the delivery of additional monetary policy stimulus to the Eurozone after some scary volatility at the start of the year. The recent embrace of negative interest rates and the reappearance of sovereign bond default risk has pressured European banks. Deflation is also a deepening problem.

ECB chief Mario Draghi is expected to respond with another interest rate cut and a possible expansion of the bank’s monthly bond purchase stimulus program.

Following a positive US jobs report, expect a volatile week for financial markets. If Draghi announces further money printing or cuts interest rates deeply negative, the euro could get sold off heavily. This could restart the US dollar bull market, sending gold sharply lower.

Or, it may not.

Remember, the trend is your friend

To explain why, check out the daily chart on gold below.

Source: Tradingview.com, Resource Speculator

Click to enlarge

Gold’s short term trend is shown by the blue line. The trend is clearly up.

Successful traders never ignore the trend. For this reason, there’s always a chance that gold could skyrocket…even if Draghi eases aggressively. If this happens, central bankers are pretty much admitting they are extremely worried about the economy. So, even if the euro crashes, uncertainty could rise and gold could fly through the roof.

Of course, gold could also rally if Draghi doesn’t meet expectations.

But, like any bear market, this is should prove to be just another rally. If gold sees a weekly close below US$1,238 per ounce, chances are we’ll see lower lows ahead. A weekly close below US$1,190 per ounce should confirm the change in trend.

As I’ve outlined to Resource Speculator readers over the past two weeks, gold has crashed into nearly every financial crisis since 1971. In my view, while the next financial crisis should be the worst ever, this time should be no different. For this reason, I’m not recommending Resource Speculator readers buy gold.

If you want to know the best time to buy gold, click here.

Regards,

Jason


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

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