Commodities are casualties of US deficit

A BILLION here, a billion there - and soon you are playing with real money. It was a sad joke in 2008 as the US Treasury threw newly printed money around in quantitative easing. Now the numbers are back to haunt us with President Donald Trump's US$1.5 trillion infrastructure programme funded by - you guessed it - a massive increase in US debt from the current US$20.6 trillion. That is assuming that, after the first rounds of a trade war, the world is prepared to continue to fund the US deficit through the purchase of US Treasuries.

Markets are like drug addicts. They know the damage that debt addiction does, but they cannot resist the debt-induced high that comes with the increased spending. These programmes have an impact on gold as a store of value, and oil as a component of growth.

The defining feature of the gold price chart is that its taken so long to go nowhere. Gold has slipped into a zombie state, largely unmoved by changes in the US dollar, interest rate predictions or any world crisis.

Gold shows weak trending activity and poor support levels. There are short-term trading opportunities but the chart is a long way from the more optimistic goldbug predictions of a return to previous highs above US$1,600.

Gold has traded in a broad trading band between US$1,210 and US$1,350. The breakouts above US$1,350 in July 2016 - and more recently in September 2017 - proved to be weak. There was simply not enough strength in the trend to keep prices above the US$1,350 level.

The current consolidation is using the US$1,350 level as a resistance level, and this is a bearish signal.

Two bullish features

Despite this weakness there, are two bullish features in the chart which suggest that a slow breakout may develop. The first bullish feature is the way that prices have generally clustered in the upper half of the trading band since September 2017. The gold price has not tested the lower edge of the trading band near US$1,210 since July 2017. This gives an upward bias to the price activity.

The second bullish feature is the steady separation in the long-term group of averages in the Guppy Multiple Moving Average (GMMA) indicator. This shows a reasonable degree of investor buying.

This is not a strong trend. In December 2017, the price dropped below the long-term group of averages in the GMMA. This shows that investor support is not strong, and this is why the uptrend is weak.

Currently, there is a high probability that the gold price will retreat from US$1,350 and retest support around US$1,290. This is the short-term outlook, and it offers short-term retreat and rally trading opportunities. We use the ANTSSYS trade method to extract good returns from this behaviour.

The long-term outlook is mildly bullish. The general upwards bias in the gold price starting January 2017 suggests a weak and slow uptrend with a long-term target near US$1,490. This is a six to 12-month outlook. This target is calculated by measuring the width of the trading band and projecting it upwards.

Confused oil outlook

The proposed infrastructure build should be good for commodities such as oil. However, the outlook for oil seems particularly confused with some analysts calling for a fall to US$52 while others have wildly optimistic targets of US$75, US$82.50 or US$100. All prices are possible, but some are more probable than others.

All of the fundamental analysis, the variables around shale oil production, Middle East troubles and increasing Chinese demand are assessed, balanced and summarised daily in the price chart which records the price actually paid for oil. Assemble these in a single chart, and clear trends and behaviours emerge. These features provide an answer to the most probable, and the least probable outcomes for the oil price.

The weekly chart shows that oil trades in bands. The standout feature on the chart is the strong support level near US$43. Starting April 2016, the oil price has stayed above this support level and moved in a prolonged sideways pattern. The upper edge of the sideways pattern is near US$54. Between December 2016 and February 2017, it acted as a strong resistance level. The rapid breakout has shown good follow-through and developed into an uptrend.

Support near US$43 and resistance near US$54 makes the trading band around US$11 wide. In the past, oil has often traded in a band around US$10 wide. This gives the upside projection target for the trading band near US$65 which was achieved in late January.

Trading bands have two important features. The first feature is the way that price consolidates near the upper and lower edge of the trading band. It is rare for a rising price to quickly move above the trading band projection level.

The second feature is the way that the price develops rally and retreat behaviour between the upper and lower edges of the trading band. This can prevail for a brief period, or for many months. The current trading band breakout and retreat is moving towards the value of the uptrend line that started in July 2017. Investors watch for a rebound from this trendline value and a retest of the trading resistance level near US$65.

The next upside target is US$76. This is calculated by taking the width of the trading band and projecting it upwards. This analysis method uses the repeated historical behaviour of the oil price.

Gold and oil show the collateral impacts of the American headlong rush into debt and the expectation that the world will continue to fund it.