Global Turmoil Adds Up To Volatility in the Markets

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Global Turmoil Adds Up To Volatility in the Markets

By Andrew Hecht /  

After the price action in November 2016 when gold put in a bearish key reversal trading pattern on the monthly chart, the yellow metal looked anything but precious. Gold fell from $1338.30 on the night that Donald Trump was elected the forty-fifth President of the United States to lows of $1123.90 in December. The decline of $214.40 or 16% in less than two months was another example of how commodity prices tend to take the elevator down when they decide to fall.

However, that December low turned out to be a bottom for the price of gold and the price has not returned to that level in 2017. In fact, this year gold rallied out of the gate in early January and had remained above $1200 per ounce for the lion’s share of the year. On April 17, the yellow metal rose to a new high for the year when it traded at $1297.40 before pulling back to the $1285 level.  Gold has experienced lots of frenetic market action this year, but it has been making higher lows and higher highs throughout the year. Gold passed a major test of the bullish trend in late February and early March with flying colors.

The March interest rate hike was a head fake

At the end of February, June gold futures rose to highs of $1268.10 but the rate hike drum beat started, and the potential for action by the U.S. central bank increased to a point where when the central bank’s FOMC sat down in the middle of March the rate increase was a done deal. Gold reacted by moving to the downside in the two weeks leading up to the Fed meeting.
 June Gold '17 (GCM17)
Source: Barchart 

As the chart of gold highlights, the yellow metal fell to low of $1198 on March 10. However, in a classic case of sell the rumor and buy the news, gold took off to the upside on March 15 posting a reversal on the day of the Fed announcement. Gold then spent a couple of weeks consolidating around $1250 before world events caused a move to just under the $1300 per ounce on April 17.

Syria and Russia, North Korea and China boosts gold

Gold began twitching its bullish nose when the U.S. responded to a Syrian chemical weapons attack at the beginning of April. The President ordered a tactical strike on an airbase in Syria, and both the Assad regime and Russia objected strenuously. Meanwhile, a few days later President Trump’s military dropped the biggest non-nuclear bomb in history on an ISIS enclave in the mountains of Afghanistan.

All the while, North Korea had been stepping up anti-U.S. rhetoric in anticipation of their national day of celebration which occurred on April 15. The U.S. warned the North Koreans against any missile tests, and President Trump enlisted the Chinese leader to help settle the affair. While the missile test failed, the North Korean leader ignored U.S. warnings, and the two countries continue to trade barbs with China pleading for a calming of tensions in the region. As the temperature rises in the Korean Peninsula, the price of gold moved to just shy of $1300 per ounce. Rising political tensions in the Middle East and Asia have caused the price of the yellow metal to move to the highest price in 2017.

The dollar rally has stalled, and European elections create uncertainty

Meanwhile, the dollar has retreated from early January highs when the greenback traded to the highest level since 2002.

U.S. Dollar Index June '17 (DXM17)
Source: Barchart

As the daily chart of the U.S. dollar index illustrates, the U.S. currency reached a high at the very start of the year, but it has been making lower highs and lower lows since. The dollar broke out to the upside in November when it traded above technical resistance at the 100.60 level on the index. However, the dollar has corrected lower and was trading below the breakout level as of April 17. Moreover, President Trump has been signaling his desire for a weaker dollar to make U.S. exports more competitive on global markets. The lower dollar has proved supportive for the price of gold over recent weeks.

It looks like the currency markets could be in for lots of volatility in coming sessions as the French will go to the polls on April 23 to elect their next leader. In the wake of populist uprisings that led to a yes vote on the Brexit referendum last June and the election of Donald Trump as President of the U.S. last November, the election in France could change the political complexion in Europe. With a weak domestic economy, the growing potential of a bailout of Italy on the horizon by the E.U., immigration issues and terrorist attacks, the far-right nationalist candidate Marine Le Pen has been rising in the polls and will likely capture a first or second place in the election. A runoff in May between the two top candidates will determine the next leader of France. Once the French election is over, Germans will go to the polls to determine whether Angela Merkel will get a fourth term as Chancellor of the nation with the strongest economy in Europe. The election of an anti-E.U. candidate in France or Germany will likely have dire consequences for the Union and the future of the euro currency. Therefore, over coming weeks the euro-dollar foreign exchange relationship could become unstable, and that could translate to still more price variance and upside for gold.

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Recent events in Syria and North Korea have raised the ante on the tension in the world. The United States has taken an aggressive stance against countries that are traditional allies of the Russians and Chinese. As the political temperature rises, so do the chances for armed conflicts. Meanwhile, the future of the European Union hangs in the balance with elections in France on April 23 and in Germany later this year.  Gold is rallying as it flashes a danger signal for the world and it is likely that we will see lots of volatility in markets across all asset classes over the coming days, weeks, and even months. Volatile markets require a cautious approach. Nadex products allow market participants to venture into highly volatile market conditions while always limiting risk to a known quantity.

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