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Gold Eyes 1240 as Fed Takes a Dovish Shift

Fundamental Forecast for Gold:Neutral

Gold prices are markedly higher this week with the precious metal rallying more than 2.5% to trade at $1221 ahead of the New York close on Friday. The advance marks the largest weekly rally since mid-June and comes amid a surge in volatility with back to back triple-digit swings in the Dow and steep losses in European equities. As fears of a global slowdown begin to take root, recent comments from the Fed have started to push out interest rate expectations with gold likely a beneficiary in the near-term.

The release of the minutes from the latest FOMC policy decision on Wednesday cited concerns among Fed officials with regards to the global slowdown while noting that the stronger dollar may dampen inflation and hamper exports. The dovish tone fueled demand for gold as markets rallied on expectations that the central bank may need to delay the normalization process. Equity gains were pared the following day however with the SP 500 posting a 2% decline as gold stretched into fresh monthly highs.

Looking ahead to next week, the attention shifts back to the US data stream with retail sales, industrial production, the University of Michigan surveys, housing numbers and the release of the Fed’s Beige Book on tap. With the recent downturn in equities and continued concerns regarding the recent USD rally, weaker data could further fuel strength in gold in the near-term. With that said, we would need to see a strong batch to cap this recent advance with the longer-term outlook remaining weighted to the downside. Look for possible strength in the coming weeks to likely offer more favorable short entries.

From a technical standpoint, gold continues to trade within the confines of a descending Andrew’s pitchfork formation with the monthly low coming in right at the rebound off pitchfork support. Prices are now nearly 4.5% off the lows and we’ll look for a breach above $1222/24 (on a close basis) to validate a break of the monthly opening range. Such a scenario targets resistance objectives at the June close at $1243- this level happens to coincide with the pitchfork bisector line late next week and may be relevant as the economic calendar picks back up. Interim support stands rests at $1206 with a move below this threshold shifting our focus back to the short side of the trade targeting pitchfork support and the 2013 lows at $1178/80. -MB