Gold suffers as earnings show upside

Gold bugs have been pointing to a recovery since shrugging off a strong triangle-like pattern breakdown in May.

Source: Bloomberg

The pattern saw the precious metal fall to a four and a half month low before rallying on market nervousness and signs of overheating in equity markets.

Gold is a store of value, so I understand the fascination with it as a trading tool as fundamentals theory would suggest inflation should be higher and the market currently is experiencing expensive entry point, making equities thin in value.

However, since the GFC, reality shows that gold is not as stable as it once was and its own success is a reason to be cautious. The fundaments have not been textbook; inflation is still benign at best and investor sentiment in the precious metal is volatile. Overnight, gold had its worst trading day this year and its biggest daily fall since October, losing over $30 to test the uptrend line at US$1303 an ounce on the daily chart.

A breakdown of the uptrend is likely to see gold pushing back into the $1200 handle and there is plenty of macro and micro news over the next 48 hours which could see this materialise.

Janet Yellen’s testimony is one, US earnings from the likes of Intel, Goldman Sachs, Johnson & Johnson and JP Morgan is another and China GDP and industrial production will be another.

A very solid earnings season in the US looks to be materialising and Citi is the latest to show that Q2 was much stronger. Yes, the bears will point to estimates being low-ball and the market is likely to discount the results somewhat. However, the signs are that the US is standing on its own two feet after so much fiscal support.

Financial confidence promotes self-support and stronger earnings have a direct effect on the final part of the financial puzzle that has been the post-GFC world; US government debt.

Increasing earnings, consumption and employment all see increasing tax collection. The US fixed its financial issues first through quantitative easing to support bank balance sheets, second through households with record low rates and now government through economic growth.

This is why Europe is still a concern and why gold remains supported; Europe has tackled the GFC the other way around, first was governments with austerity, households with record low rates, but bank balance sheets have not been touched and QE although outlined at the June meeting sees European banks still shaky and the issue in Portugal highlight this bank balance sheets in the periphery are still under pressure. This is why I still see the US as the main investment case in the coming few months.

Ahead of the Australian Open

Asia sees a plethora of data today with the BoJ and the RBA are on the newswires. The BoJ is releasing its policy statement followed by a press conference; it will be interesting to hear how the bank see the current state of play having seen core inflation starting to stall – all eyes on USD/JPY.

The RBA will release the minutes from the July 1 meeting. Will it continue to edge back toward a dovish outlook? From listening to board members, notably Glenn Stevens, it seems that is a likely conclusion.

China data in new loans is scheduled, but the release is over a three-day time-span and may not materialise today.

June production week starts in earnest today with PanAust, Whitehaven Coal and Oz Minerals the ones to watch, PNA particularly considering the market rumours the takeover deal from Guangdong may be deferred or watered down.

We are currently calling the ASX 200 up by 0.4% to 5533; as the strong leads from the US drive the market higher, with the earnings being released tonight in the US I see this week being a complete reverse of last week.

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