Last fall, our reading of the Gold futures chart led us to believe we would see a final decline below $1100 an ounce to establish the bottom that would support a new rally. To be clear, we were – and are – bullish on gold at these levels. But we expected a bit more down before we started to move up.
That is still a possibility, but it is starting to look more remote, thanks to a sudden blast of Swiss rocket fuel that has decimated FX traders and caused little echoes to ricochet around related markets, including the gold futures.
Near the end of last week, the Swiss National Bank, after promising to defend to the death the floor it put under the Euro/Swiss Franc pair, suddenly reversed course, allowing the “Swissie” to float to whatever level the market thought proper.
Explosion
Bang! In a matter of minutes, the Franc blasted higher, while the Euro went in the tank, and there were lots of long Euro positions open, because the market was trading close to the “permanent” floor. And hey, the SNB promised they wouldn’t let it go any lower. I mean they promised!
FX positions are typically leveraged about 50 to 1, which means there is the risk of $50 in losses for every $1 in the account. The customers on the wrong side of the Euro/Franc trade probably lost everything in their account. But the broker likely had to make good on many times that amount, because the broker is responsible to the counterpart for any losses its customers can’t cover.
To put this in perspective, when the tsunami rolled in, FXCM, the broker which was hit hardest, had about 232,000 individual accounts with about 500,000 open FX positions.
When the dust cleared, one FX broker was out of business, another needed a $300 million bail-out package, and losses of $150 million and up were commonplace among large FX trading houses.
The consequences
One of the long-term consequences of this debacle – apart from enough lawsuits to keep a battalion of lawyers fully employed for the rest of this decade and beyond – is likely to be a large increase in the margin requirements for FX traders (and probably others). That will drive many small retail traders out of the market.
But the immediate effect was a nice little bump for both gold futures and the S&P 500 large cap equity index. Sudden unpleasant surprises make investors look for a place to hide. Right now, the US dollar and US equities are the cleanest dirty shirt in the laundry, and gold is … well, gold is where money sleeps until it is safe to come out again.
In fact, gold has been having a good run, up almost $150 an ounce since the low at $1130 on Nov. 7. In 2015, it is almost straight up; so far, there have been only two losing days in January. About $110/ounce has been added since the January 1, about a third of that in the two trading days since the Swiss surprise.
Will It Last?
The obvious question is what happens next? Can gold hold the gain through the week and beyond? We think so. In addition to murdering FX traders, the SNB also announced negative interest rates for some deposits held in Swiss Francs. You now have to pay Swiss banks to hold your money, if you want the protection of their currency.
Negative interest rates force conservative investors out of relatively safe deposits and seduce them into riskier equities. Negative rates (and the revaluation of the Swissie) also raise concerns about the stability of the markets. Both influences create demand for gold as the traditional safe haven for frightened money.
How to trade it this week
Gold futures closed at $1276 on Friday (Jan. 16). We may see a little retracement in the early part of the week, and $1250.50-46.50 area will be a key zone. Holding above it could see gold futures rising to $1294-98 or higher up to $1338-47.50, if the price breaks above the $1310 level.
If the price breaks below $1250, then $1220-10 becomes a major short-term support. As long as that level holds we may be seeing the beginning of a new medium-term bullish trend.
We will be looking at the long side if there is a pullback this week.
Gold futures Jan. 16, 2015. Weekly bars
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