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Gold Prices Vulnerable into February Open- Outlook Constructive Above 1200

Gold Prices Vulnerable into February Open- Outlook Constructive Above 1200

Fundamental Forecast for Gold: Neutral

Gold prices rallied higher again this week with the precious metal up 0.87% to trade at 1230 ahead of the New York close on Friday. Interestingly enough, the advance comes alongside strength in the greenback and took bullion prices near-three month highs before turning from technical resistance late in the week. While the broader focus for gold remains constructive, we continue to highlight the near-term risk for a more meaningful pullback in price.

Federal Reserve Chair Janet Yellen will take center stage next week at the two-day semi-annual Humphrey Hawkins testimony before congress. Yellen is slated to speak at Senate Banking Panel on Tuesday followed by the House Financial Services Committee on Wednesday and traders will be looking for cues from the Chair as to the timing of the next interest rate hike. As is stands, Fed Fund Futures are pricing in a 70% likelihood the central bank will move on rates in June. Keep in mind expectations for higher rates will tend to weigh on non-interest bearing assets like gold.

From a data standpoint, Traders will be closely eyeing the release of the January Consumer Price Index (CPI) & Retail Sales figures next week. As U.S. economic data continues to improve and a new ‘growth friendly’ administration taking the reins, the Fed may come under increased pressure to normalize policy and as such, may limit the gold advance.

  • A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net long Gold- the ratio stands at +1.45 (59% of traders are long).
  • Long positions are 4.6% higher than yesterday but remain 2.1% below levels seen last week
  • Short positions are 17.8% lower than yesterday but still 9.2% above levels seen last week
  • It’s worth noting that the recent sharp decline in short positions (move higher in the ratio) highlights the near-term risk on to the long-side. Look for a continued build in long positioning in the days ahead for further evidence of exhaustion.

Gold Weekly

Gold Daily

Last week we noted, “Bottom line: the battle lines are drawn at 1171-1219 heading into the close of January trade & while we may yet see some softening / sideways price-action, weakness into the lower bounds of this range should be viewed as a buying opportunity. Interim support rests at 1200 with a breach of the highs targeting subsequent topside resistance objectives at 1241 & 50% retracement at 1249.”

The topside breach seen this week charged a rally into confluence resistance with price turning just ahead of the 1249 target (high was 1245). Note that we’ve continued to mark divergence into these highs and I’m still mindful of trying to chase this any higher from here. Note that there’s only been one down week so far this year as equities have continued to push into record highs- that’s not a reason to get bearish, but certainly highlights the threat to the current uptrend.

Interim support rests at 1219 with a break below the ML extending off the May highs (converge on the monthly open at 1210) needed to suggest a more significant correction is underway. Topside targets remain unchanged with a breach higher targeting the 200-day moving average at 1263 backed by confluence Fibonacci resistance into 1277/79.

---Written by Michael Boutros, Currency Strategist with DailyFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.