Without a doubt, markets are waiting for the release of minutes from the Fed's July policy meeting for clues on the timing of stimulus tapering. The U.S. central bank has said it would begin scaling back its $85 billion in monthly bond purchases this year if the economy recovers as expected. But Fed officials are not in consensus on whether they should cut back from September on as expected by the markets.
Speculation that the U.S. central bank is poised to begin tapering its stimulus as early as September is generally positive for the dollar and negative for precious metals. What impact could the Fed minutes have on further prices of gold and the entire precious metal sector? Let's see what the markets think.
We examine the US Dollar Index chart and the copper chart to see if there's anything on the horizon that could drive gold prices higher or lower in the nearest future (charts courtesy by http://stockcharts.com).
In our essay on gold and the dollar on August 9, 2013 we wrote:
(...) The recent declines took the index to the medium-term support line (currently close to the 81 level). Keep in mind that this strong support line stopped the decline in June (it was not even reached) and encouraged buyers to act, which resulted in a sharp rally in the following days.
As you see on the weekly chart, we saw a similar situation in the previous week. The dollar jumped from the medium-term support line and climbed up above the 50-week moving average. However, this improvement didn't last long and the USD Index declined once again in the recent days. Despite this downward movement, the previously mentioned medium-term support line stopped the decline and the dollar remains above it.
From this perspective, the medium-term uptrend is not threatened, and the situation remains bullish. Therefore we can expect the dollar to strengthen further in the coming weeks. It seems that it will rally sooner rather than later, fueling declines in the precious metals market.
Once we know the current situation in the USD Index and its implications for the precious metals sector, let's turn to the next interesting chart.
As you know, commodities usually move together on a short-term basis, even though they may evolve into different formations in the medium- and long term. That's why we decided to feature the copper chart today. Does it provide us with interesting clues as to the next possible moves in the entire sector? Let's take a closer look at the chart below and find out.
The first thing that we see on the above chart is a big head and shoulders pattern. According to theory, a move below the neckline triggers further declines. In the above case, copper dropped below the support level based on the June 2010 low and the October 2011 bottom and has already confirmed this breakdown. The price target for the pattern is at around $2.00 -$2.30.
This level is also in the proximity of the area where two strong support levels intersect: the rising long-term support line and the Fibonacci 61.8% retracement level based on the entire 2001 - 2011 rally.
In the recent days, we have seen a short-term pullback, which took copper to the neck level of the above-mentioned head-and-shoulders pattern. However, there was no breakout above it. In other words, this means that nothing has changed as far as bearish implications of this pattern are concerned.
From this point of view, it was just another pullback, which didn't invalidate the previous large head and shoulders pattern or its implications.
Consequently, the medium-term outlook for copper remains bearish.
Before we summarize, we would like to introduce you to our new tool - True Seasonals, which enables you to see whether the price of an asset is usually growing or declining during a particular part of the year (at the same time taking into account the effect of the expiration of derivatives), and whether the risk involved tends to be relatively high or relatively low.
Let's take a look at the True Seasonal patterns for this month.
The True Seasonal pattern for August generally shows a move up in the first half of the month but this move is then erased close to the middle of the month. The tendencies for silver and mining stocks are similar - initial move up, and then a slide. So far it seems that the correction/decline was delayed, but that doesn't mean it won't happen shortly.
The USD Index usually drops in the first few days of the month and then continues to rally peaking before the end of August. It peaks before gold, silver and mining stocks bottom, so there's usually a confirmation of the change in the trend in the form of the sector's lack of reaction to the dollar's weakness. We haven't seen this pattern in the past few days, so we don't have an indication for the coming rally. If we don't see a decline/correction soon, the True Seasonal patterns will become bullish for the precious metals market.
The most recent developments seem to confirm the seasonal patterns, at least to some extent (the actual moves might be delayed in comparison with the pattern). It appears that the price action on Monday played out in line with the previous indications of True Seasonals - we are seeing a slight decline now.
Summing up, despite the recent downward movement in the US Dollar Index, the medium-term uptrend is not threatened yet. From this point of view a move to the upside is still likely to be seen. If we see such price action, it may trigger a decline in the precious metals market. Additionally, the medium-term outlook for copper remains bearish and the True Seasonals trends don't indicate higher prices in the short run based on the lack of strength relative to the USD Index in the past few days. It seems that betting on higher prices of precious metals is risky at this time.
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Thank you for reading. Have a great and profitable week!
