Gold at Risk for Further Losses Amid Imminent U.S. Debt Deal
Fundamental Forecast for Gold: Bearish
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Gold prices plummeted 3.21% this week with the precious metal trading at $1268 ahead of the New York close on Friday. The losses come on the back of a surge in volatility this week in broader risk assets as the stalemate regarding the debt ceiling and the ongoing government shutdown in Washington continues to dominate media headlines. While most financial publications will attribute recent price action as exclusively in response to the ongoing drama on Capitol Hill, price action in gold has been rather telling with both the monthly and weekly opening ranges proving bearish for the yellow metal.
With the Government shutdown still in effect, US economic data will be limited again next week and will be contingent on whether or not congressional leaders are able to strike a deal. Should a decision be reached, all eyes will fall on to the September Non-Farm Payrolls report for an updated assessment on the health of the US labor markets. Consensus estimates are calling for the addition of 180K jobs last month, up from 169K the previous month, with the unemployment rate widely expected to hold at 7.3%. Note that if the government shutdown is resolved, we will also shift our attention to retail sales, inflation and housing data later in the week. Look for strong US data to continue to weigh on gold prices with the only two most significant threats to our bias- 1. No deal is reached and the markets begin to price in some sort of technical default or – 2. The government does re-open and the subsequent data releases come in surprisingly weaker than expected- Both would suggest that the Fed would have limited scope to taper QE this year and would likely offer some support for bullion prices.
Such times call for heavier reliance on the technicals with the gold outlook continuing to play out within the guidance of our broader forecast. As we noted in Tuesday’s scalp report, the opening-ranges in gold have served us extremely well since the start of 2013 and we will continue to utilize these developments as we ascertain our short/medium-term biases. This week, gold prices broke below key support at the confluence of the October range lows made early in the month and the 61.8% retracement off the yearly low at $1278. As such, our focus remains lower against the opening range highs at $1337.
Although prices probed below the $1268 support level, we will continue to watch this threshold which represents the longer-term 61.8% retracement of the ascent off the 2009 lows. Note that as of 27pm ET the daily RSI signature was at its lowest level since early July and marks the deepest directional break below the 40-threshold since mid-June (which took us into the yearly lows at $1180). Look for pullbacks to offer favorable short entries as we continue to hold within the confines of a well-defined descending channel formation off the August highs. Our primary support objective now becomes $1233/34 with a break below targeting $1209 and $1181. A breach of the October highs puts us neutral with our bearish invalidation level now brought down to $1367. -MB