Weekly Metals Wrap
Gold Shrugs Off Fed Rate Hike To Trade Higher on Risk Aversion
The yellow metal surged higher this week, despite initial weakness in response to the latest US interest rate increase. Following the initial reaction to the decision, the US Dollar softened as the market digested the lower revision to the Fed’s dot plot forecasts which now project just two rate hikes next year, down from three prior.
While the Fed noted that the economy remains strong according to the latest data, it said that it would be closely monitoring global economic and financial developments in making decisions on further policy adjustments. The market has taken this statement as a sign that the Fed is likely to follow a slower pace of rate hikes over 2019, reflected in reduced market pricing for 2019 rate hikes.
Gold has also benefitted this week from the wave of risk aversion which swept across the markets in response to the rate hike, headlined by collapsing oil and equity markets. Despite the reduced outlook for rates next year, higher US rates will still constrain financial activity both domestically and for emerging market economies, many of whom experience funding difficulties under higher US rates.
Gold prices are now firmly above the 1235.30 level support, and while above here, focus is on further upside with the retest of the broken bullish trend line from 2015 lows, the next key resistance to watch. The 1279.71 level also holds the completion of a corrective ABCD pattern; the confluence between these two elements could prove to be a turning point for gold.
Silver prices were higher this week also, displaying their correlation with gold. However, the rise in silver was tempered somewhat by the sell-off in equities due to silver often being used for industrial purposes which means that equity price moves affect it somewhat differently to gold.
While many investment banks have continued to highlight a positive outlook for silver linked to increasing demand from the auto sector, silver has spent the last few months in stagnation near recent lows, and until price makes any serious traction higher, focus continues on further downside eventually from here.
For now, silver prices remain stagnant just above the 13.6704 – 13.9612 level support. Focus remains on further eventual downside unless we see a break back above the 15.1825 – 15.5734 level.
The red metal was sharply lower this week moving down to its lowest level since September 2017 as higher US interest rates and risk aversion weighed on sentiment. Alongside initial strength in the US dollar, copper has also come under pressure from an increased risk-off tone linked to the ongoing conflict between China and Canada.
Following, Canada arresting a prominent Chinese businessman, China has responded by arresting three Canadian citizens in China. The market is growing wary that these retaliatory actions By China will threaten the ongoing trade talks between the US and China. Recent Chinese economic data has printed weakly, and survey data highlights a lack of confidence in the Chinese economy. If the trade talks fail, the impact could be fatal for the Chinese economy and for copper prices which are falling on expectations of reduced demand.
Copper prices have now moved strongly below the 2.767 level which has been a key order flow point for price over the last few months as you can see with the tightly congested price action around the level. To the downside now, the next key support is the 2018 swing low at 2.575 with the rising trend line from 2016 lows coming in just below and deeper still, the December 2016 low at 2.443.
Following a strong rally last week, iron ore prices were much more subdued this week though slightly lower in light of the stronger US dollar and subdued risk tone. As the market watches the ongoing standoff between China and Canada with caution, sentiment has turned lower.
After trading back up to pierce above the $70 level top, which marked the high of the Q2/Q3 range, iron ore prices have since turned lower again. While above $68, focus remains on further upside with the $72 level being the next key resistance. To the downside, the $66 level is the next key support region.