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Risk-on becomes the flavour of the month while gold looks overvalued

Posted on: 21 January 2019 , by: Darren Sinden , category: Market Review

Contrarian: Fade the rallies in gold on improving investor sentiment

Gold has been gaining

Since the start of 2019, gold has gained almost +1%, which was part of a more substantial move over the last three months, adding +5% to the value of the yellow metal. A large percentage of those gains were generated in December during a period of heightened volatility in the markets.

Gold acts an alternative investment during times of financial stress. However, stress levels in the markets appear to be receding as we move deeper into January. The VIX index, which tracks ‘fear and greed’ among investors, has retreated by some -25% during 2019, testing back to its 200-day moving average.

Risk assets are back in favour

At the same time, risk assets such as US equities have made significant gains. The US 2000 index that tracks the performance of US small cap companies has added +7.9% during January, and the technology-heavy US 100 index has posted gains of more than 5% since the New Year.

Those moves imply that risk on is the dominant attitude among investors suggesting that safe havens such as gold should now be out of favour, though gold has held on to its recent gains.

Are investors hedging their bets?

The global macro background or big picture for 2019 has deteriorated amid concerns about the trade war between the USA and China, as well as weaker global growth and the possibility of recessions in leading economies such as Germany, the wider Eurozone and the USA.

A slowdown in the pace of planned rate rises by the Federal Reserve in 2019 has also caused investors to reassess their positioning.

 

CBOE Index

Solid resistance

Despite these concerns, the chart below shows the gold price has run into a solid looking barrier between US$1296 and US$1298 per ounce. This resistance has been tested during January, but so far it has held. The recovery in and performance of risk assets in January suggests that it will continue to do so. The model I follow shows gold as a mid-strength bear trend and has a price objective for the metal well below the current levels.

 

Australian Dollar/US Dollar (AUDUSD)

While that remains the case, traders could sell into or fade any rallies in gold until the price action tells us to stop. Price action such as a sustained close above or intraday break above the 4th of January high posted at $1298.62 and the 18th August 2017 high of $1301.

We've been here before

Gold tested through $1300 before selling off again during its high point of $1309.60 in the week of the 15th of June 2018. It finished that week down at $1279.55, not so far from the then weekly low of $1275.43.

The 4th of January low found at $1276.60 gives us a $24 range to play with. More recently, gold prices have tested back towards $1285/6. Levels that provide an ideal place to close any short trades opened around the recent highs. Of course, a concerted break below $1285 and $1280 could open the door to a larger downside move.

 

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