Fundamental Forecast for Gold: Neutral
- Gold Breaks Channel Support; Larger Bear Resumption?
- Gold, Crude Oil Eye US Data as Fed Taper Speculation Swells
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Gold prices were markedly weaker for the third consecutive week with the yellow metal plummeting more than 5.2% ahead of the New York close on Friday. The losses mark the largest single week decline since June and come ahead of next week’s highly anticipated FOMC policy meeting where investors will be closely eying the taper timetable and the updated forecasts from the committee. Until then, bullion remains at risk heading into next week after breaking below key technical support.
Inflation data early next week will be central focus ahead of central bank policy meeting with consensus estimates calling for a print of 1.6% y/y for the month of August, down from 2.0% y/y in July. Interestingly enough, core CPI 9ex food & energy) is expected to uptick to 1.8% from 1.7%. Although inflation data has remained rather well anchored at or below 2% since the start of the year, it has been on the rise for the past 4-months and the print could impact help support gold prices ahead of the Fed with a stronger than expected read, specifically in core prices. Should the data come in line with expectations or weaker, look for prices to remain under pressure as the appeal of gold’s anti-inflationary hedge abates and expectations of Fed tapering weigh on demand.
The street is now widely expecting the Federal Reserve to begin tapering asset purchases in the amount of $10 Billion next week with price action in gold and treasuries both suggesting the move may have already been priced in. This month is not your run of the mill meeting- we get the Bernanke presser as well as the updated quarterly forecasts from the committee as they pertain to growth, inflation, unemployment and interest rates. As such, expect a surge in market volatility with gold to come under pressure in the unlikely event the size of the taper is more aggressive. On the back of last week’s mixed NFP print, it’s likely the central bank will take a cautious approach to the “taper talk” as Bernanke tries to limit the spillover effect and gradually end the easing cycle.
From a technical standpoint, gold broke through key technical support this week at $1356 (representing the confluence of the 100% Fibonacci extension off the August highs, the 100-day moving average and channel support dating back to 2013 low made back in June). The move reaffirmed our bias and triggered all three price targets noted in this week’s scalp report before settling just above the $1297- $1306 support zone. Note that daily RSI is now below the 40-threshold for the first time since early July and marks the first directional breaks sub-40 since the mid-June decline. Only a breach above $1373 invalidates the broader decline off the August highs with a break below support targeting near-term objectives at $1268-$1276 and $1234. With that said, we will maintain a neutral bias heading into FOMC noting our invalidation levels and price targets. -MB
---Written by Michael Boutros, Currency Strategist with DailyFX
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