Gold uptrend could break in the near future

Having seen an intra-day move to US$1182 an ounce, the gold rally today has been very solid.

Spot prices had appreciated 16.7% to the high of the year; snapping Australia out of a bear market which saw 2013 yield a -34% return.

Three major events have contributed to the reversal in gold momentum:

  1. US economy: The sharp and sustained downtrend in US activity driven by one of the harshest winters in recent memory saw returns and economic growth stagnating.
  2. Chinese credit crunch concerns: The first major corporate bonds default coupled with further signs of hot money outflows as commodity collateral and falling CNY dented returns and stokes fears of defaults. It could be argued that this is gold bearish as financing demand will be lower
  3. Crimea: Tensions between Russia and the west meant investors looked to store value in safe-haven assets that can avoid sanctions and asset freeze. Gold was an easy choice for this.

While there is always a chance of further escalations in Eurasia, which is gold-supportive, I see the US and China activity accelerating into Q2 and Q3, which is gold-bearish. Realistically for gold to really ramp up to 2011 - 2012 levels the US slowdown would have to see significant slowing enough to see tapering halted and even reinstated and employment reversing from its current trend.

Overnight manufacturing data saw a marked improvement in the US, and China has this week announced plans to stimulus domestic demand by increasing construction and infrastructure projects both of which are economic positives.

With that in mind the current trend in 2014 looks possible to breakdown. The recent break in the up channel suggests traders are shedding the metal for investment vehicles such as the USD and US treasuries as the tensions in Crimea subside. I would suggest gold over the medium term will continue its march lower as the US recovery continues.

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