Has a Bottom Formed in Gold Markets?

By Richard Cox
Richard Cox
Richard Cox
May 27, 2014 Updated: April 23, 2016

Has a Bottom Formed in Gold Markets?

 Gold markets have seen a good deal of volatility in the last few years, as precious metals investors gauge majority sentiment and establish positions based on the underlying trends in risk aversion.  Last year was the worst in recent memory for those that are bullish on the metals space, as both gold and silver posted annual declines for the first time in more than a decade.  These moves were driven in large part by stabilization in economic data and a steadily progressing stock market. 

 From a comparative perspective, the SPDR S&P 500 Trust ETF (NYSE:SPY) has advanced to record highs while the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Silver Trust ETF (NYSE:SLV) have been in near free fall.  Moves like this are not altogether surprising, given the fact that precious metals tend to be viewed as protective assets while the major stock benchmarks tend to perform well when the growth outlook is encouraging and investors are willing to take on more risk. 

 Changing Stance at the US Federal Reserve

 Another factor to consider is the changing stance at the US Federal Reserve.  The Fed has already started making significant reductions in its historical stimulus programs (so called quantitative easing, or QE).  With this in mind it is clear that the Fed is now looking for the proper scenario to start raising interest rates to a more normal level.  According to market experts at Bank De Binary, an environment where interest rates are headed higher is not one that is conducive to long term gains in precious metals.  This is an important factor to consider as it certainly changes the outlook for how assets like gold and silver should be traded when looking at long term time horizons. 

 Additionally, this type of environment is likely to bring buying back into the US Dollar.  Higher interest rates make it more attractive for investors to establish long term positions in the currency, so it will be interesting to watch price behavior in the PowerShares DB US Dollar Index Bullish ETF(NYSE:UUP).  Furthermore, situations that are positive for the Dollar tend to be negative for gold.  Gold is priced in Dollars and these two assets share an inversely correlated relationship. 

 Gold Could See Further Declines

For all of these reasons, it is unlikely that we have seen a bottoming out in gold markets.  A strengthening Dollar, rising interest rates, and stabilizing economic data all suggest that investors will have less need to establish protective positions in safe haven assets.  Most of these trends are easy enough to predict, one you understand the historical tendencies in how all of these assets typically trade in relation to one another.  More information on market trends can be found in the Banc De Binary educational center, which contains many excellent materials and information on how to better trade each of these markets. 

In any case, the outlook here is relatively clear.  Recent headlines have focused on easing gold import restrictions in India, but this has done little to support gold prices this week.  This is telling, as India is still the world’s second largest importer of gold (falling behind China last year in total import numbers).  The expectation here is that demand should rise in India but investors are still unconvinced that this will be enough to support the gold price in light of other issues.  This type of activity should light warning signals for bullish precious metals investors.