Kaloti Precious Metals-Morning Market Report-Monday, April 17, 2017

Market Daily & Weekly

Note: Indications only, open and closing prices are bids; Data source: Bloomberg; Times as per Dubai

Fundamentals and News

$1,400 Gold Resistance May Be the New $1,300

Gold looks poised to stake its claim again as the asset-class performance leader. It withstood a substantial U.S. dollar rally in the run-up to the current Federal Reserve rate-tightening cycle that's pressuring the greenback. Gold's other key adversary -- the stock market -- is entering the time of year where it often underperforms, and may be due for some return to normalization as euphoria over the Trump administration subsides. The VIX volatility 26-week average is near the lowest since pre-crisis 2008.

Gold and the S&P 500 total return are both up almost 20% to April 11 in the current rate-tightening cycle. If stocks stall or decline, rate hikes could too -- an additional support factor for gold. Declining bond yields despite increasing rates could signal no more rate hikes

Down about 10 bps in 2017 and 5 bps in the current rate-tightening cycle, declining U.S. 30-year bond yields may be the canary in the coal mine that supports gold prices. Decreasing bond yields indicate reduced inflation expectations. Despite Federal Reserve rate tightening and warnings of reduced Fed bond holdings, sustained lower yields are a substantial statement of bond-price strength. Bond yields and one-year federal funds rate expectations were close companions until year-end 2016, but have diverged in 2017.

The divergence comes as yields decline and rate expectations have increased. This trend is unsustainable, but could last until one side gives. Left by the wayside for the past few years, U.S. Treasury long bonds are a good longer-term, highly sensitive indicator of U.S. inflation

If gold can hold its own despite a 20% rally in the U.S. Dollar Spot Index and 38% jump in the S&P 500 since the start of 2014, it should perform well when its traditional adversaries falter. Toppish activity appears clear in the dollar, down 3.3% in 2017 despite the U.S. interest-rate cycle well on its way. With a beta of minus 1.2x to the dollar in the past 10 years, gold should be a prime beneficiary if the dollar is done rallying.

Historically zero-correlated to the stock market, the relationship to gold is likely to be much more negative in the near future. A declining stock market is a prime factor to reduce rate-hike expectations and thus the dollar's value, supporting gold and silver, as occurred in 1Q16.

Data Forthcoming Releases

Courtesy: http://kalotipm.com.sg/kaloti-market-report-17th-april-2017