Gold's Headwinds Are Getting Stronger

(Bloomberg View) -- Gold prices have been falling, closing below multiple critical levels. A number of factors are conspiring against the precious metal, and they are likely to worsen: strong equity markets, the prospects of short-term dollar strength and the cryptocurrency feeding frenzy.

After trending higher for much of the year, gold hit a ceiling in early September as U.S. stock prices powered ahead on rising optimism for imminent tax cuts. The revaluation trade supporting equities that is based on expected future lower corporate tax rates appears justified. Once those cuts are signed into law, there is likely to be more upside for equities and further downside risk for gold.

A strong equity market is not the only thing weighing on gold. After all, prices rose from December 2016 to September 2017 despite the rally in U.S. equities. Dollar weakness provided support to gold through September, but when that trend seemed to reverse and the greenback strengthened, gold prices fell. But now, several factors may give the greenback a short-term bump. The November employment report was strong, and the Federal Reserve is likely to raise its target for the federal funds rate this week by 25 basis points. FOMC members are also likely to raise their rate forecasts for 2018 and 2019.

Such changes can have a significant impact on financial markets, and an increase in expected future rates may send the dollar higher. The Catalan election in Spain on Dec. 21 is also likely to engender some short-term euro weakness and dollar strength. These dollar-bullish factors bode ill for gold in the immediate term.

Gold's Headwinds Are Getting Stronger

Aside from the inverse relationships with equities and the dollar, the cryptocurrency frenzy also threatens gold prices. Gold bugs -- investors who expect an inevitable return to a gold standard or who see the precious metal as a hedge against currency weakness with massive upside potential -- have been maligned for decades, but they now seem extremely reasonable compared to mania-driven cryptocurrency investors who appear driven by a fear of missing out on something they may not even fully comprehend.

And yet, the cryptocurrency market is vying to unseat gold as the anti-establishment, anti-fiat currency, anti-central bank investment of choice. Until earlier this year, if you had been skeptical of central banks and fiat currencies, you might have been a gold bug. But if you remain disenchanted with the global financial system, if central bank balance sheets concern you, if are concerned about the tax reform bill’s ability to cause the national debt to rise, or if you believe that the $200 trillion entitlement bubble is going to crush the greenback, you now have a myriad of cryptocurrencies to invest in.

Some of the names of these cryptocurrencies we cannot even put in print because they are vulgarities. And yet, they are being assigned value, and while many wonder how high bitcoin and others can go, one thing appears to be clear: Bitcoin and cryptocurrencies are pulling would-be gold bugs and investors away from gold. And if equities remain strong and the dollar finds some modicum of support, gold prices could suffer as long as the cryptocurrency bubble grows.

Gold's Headwinds Are Getting Stronger

Trading technicals have also conspired against gold. Prices last week closed below the lower end of their Bollinger Bands, which are a measure of standard deviation that can help identify turning points in an asset's trajectory. Plus, longer-term trends of higher lows and lower highs converged, and gold prices fell below a critical trendline. These are bearish signals, and if the fundamentals remain bearish for gold, more bearish technicals are likely be triggered and result in further weakness in gold prices.

Gold's Headwinds Are Getting Stronger

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jason Schenker is president and founder at Prestige Economics LLC.

To contact the author of this story: Jason Schenker at jasonschenker@prestigeeconomics.com.

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