Fundamental Forecast for Gold:Neutral
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Gold prices are weaker for a third consecutive week with the precious metal off by 1.5% to trade at 1104 ahead of the New York close on Friday. The decline is once again eyeing key technical support and the major event risk scheduled for the week ahead may pave the way for gold going into the fourth quarter.
It was a quiet week for U.S. economic data ahead of next week’s jam-packed schedule with retail sales and inflation data kicking off a major week of event risk for gold and the greenback. The FOMC Policy Meeting will be central focus next week as markets await the highly anticipated rate decision where diminishing expectations for a September lift off have raised the risk for a volatile session. Recent market turmoil, renewed concerns regarding a material slowdown in China alongside the disinflationary environment across the major industrialized economies may spur another unanimous vote to retain the current policy.
With that said, a downward revision in the growth and inflation forecast accompanied by downtick in the interest rate dot-plot may dampen the appeal greenback, but the committee may largely stay on course to remove the zero-interest rate policy (ZIRP) in 2015 as central bank officials still anticipate a stronger recovery to materialize over the remainder of the year. In contrast, the largest risk going into the interest rate decision is if the Fed shows greater willingness to further delay the normalization cycle and deterioration in rate expectations may put gold on a firmer footing, especially as the yellow metal approaches critical support.
From a technical standpoint, gold broke below the 61.8% retracement of the August advance at 1114 with the decline approaching critical long-term technical support into 1096. This region is defined by the confluence of the 2015 low-day close and a multi-year trendline support extending off the June 2006 & 2008 lows. A break below this level would mark significant downside risk for bullion prices with such a scenario targeting support objectives at 1067, the 2010 low at 1044 & a key Fibonacci confluence into 975/80.
Note that gold has continued to trade within the confines of a well-defined descending median-line formation and although prices are coming into key support, the broader outlook remains weighted to the short side sub-1151. We’ll be looking for the FOMC reaction to offer further near-term guidance as the dollar reacts to adjustments in interest rate expectations.