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Six Reasons for Gold Pullback
08/03/2015 9:00 am EST
Six major reasons—with different time frames and differing importance—can be provided for gold’s recent collapse, explains Adrian Day, editor of Global Analyst.
An improving US economy raises prospect of an interest rate hike. Though the Fed may well raise the Fed Funds rate this year, I doubt this would signal the start of a rapid series of rate increases.
Moreover, a quarter point hike in the rate is surely just about the most telegraphed rate hike in history, so should be fully discount in the gold price.
Related to this, is a reasonably strong stock market, making the need (or perceived need) for insurance less than in the past.
We look on it differently, as the stock market it getting more and more into overvalued territory with the risk of a correction increasing.
The dollar has recovered from its earlier correction and has resumed its upward march. Gold likely won’t recover meaningfully until the dollar peaks.
There are lessening global concerns, following the Greek deal and Iran nuclear agreement. Whether these crises have faded permanently is a different question of course.
Chinese gold purchases were less than expected. At the same time, concern about a slowing Chinese economy has had some effect on many commodities in the past several quarters.
In such a climate, all news is viewed through a bearish prism. This may represent the rout that the market needed before starting to claw back up, exaggerated by being a seasonally weak period.
And the stocks are at such extreme lows that the rally—whether it starts tomorrow or next month—could be strong.
So we would be buying—selectively and cautiously by all means, but buying—when others are selling.
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