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Was Thursday’s Sharp Decline a One and Done?

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This week was started on a solid and positive note. The entire precious metals group saw price advances. On Monday gold futures broke and closed above the key psychological level of $1300 per troy ounce. This was followed by two consecutive trading days which contained solid price advances. In fact, for the first part of the week gold had three consecutive higher highs, higher lows and higher closes, when compared to the previous day. The first part of the trading week contained all the characteristics one would expect to see during a key reversal or pivot point when a a change in market sentiment results in a trend change.

However, on Thursday the entire precious metals complex traded under dramatic pressure. Gold futures had given back all of the gains achieved during the week, and silver lost over 2% in value closing below its 200-day moving average.

Today the precious metals recovered with gains across the board, gold had a fractional price increase of 0.11%, and palladium had the largest percentage gain of the day resulting in a price advance of 1.12%.

Which leads us to ask the following question; was Thursday’s sharp price decline a “one and done? Or a signal that the bullish trend which began on Monday was short-lived? Market data, as well as the underlying fundamental factors that influenced a shift in market sentiment at the beginning of the week seemed to return today after yesterday’s defined and dramatic selloff.

Gold lost value this week closing below $1300 and today’s recovery was modest at best. However the dynamics of the fundamental factors and events that ignited the rally seem to be still influencing market sentiment.

On Tuesday we spoke about the multiple factors that were the underlying reasons for the shift in market sentiment. The 180-degree pivot by the Federal Reserve had not changed, although some analysts tried to paint a more hawkish Fed after reading the minutes from FOMC meeting minutes held last month, which were released on Wednesday. The facts remain that the Fed had substantially changed their monetary policy. The first sign of this pivot was revealed in January. The minutes from that meeting did not contain a revised dot plot, which clearly indicated that their monetary policy was shifting. This was confirmed in last month’s FOMC statement and minutes which revealed that the Federal Reserve will leave interest rates at their current level throughout 2019, with one interest rate hike in 2020.

Still present is the uncertainty that there will be any quick resolution regarding the trade dispute between the United States and China. Data from the IMF this week confirmed that this issue continues to be the underlying cause of behind the slowdown in the global economy.

The IMF report confirmed that the 2019 global growth is in fact deteriorating, suggesting that all major economies as well as most big emerging market economies are weakening.

The IMF’s latest economic forecasts cut the outlook for growth in 2019 to 3.3% from estimates of 3.5% in January and 3.7% in October. The decline has been broadly felt, with all major advanced economies, including the U.S., and most major emerging-market economies seeing deterioration in their outlook.

The global economic outlook was also exacerbated this week when President Trump announced that he would impose new tariffs on European goods in response to approximately $11 billion worth of subsidies provided to Airbus.

This week also contain reports that the central banks worldwide have been accumulating bullion and increasing their gold reserves. Some analysts have also said that they don’t expect central banks to stop buying gold anytime soon as countries reduce their dependence on the U.S. dollar.

The collective weight of these fundamental factors should continue to shape market sentiment next week. It is because of that fact that yesterday’s sharp price decline could in fact be a one and done, or single day event.

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Wishing you as always, good trading,

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