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Gold Prices Overbought into 2017 Highs- Broader Outlook Constructive

Gold Prices Overbought into 2017 Highs- Broader Outlook Constructive

Michael Boutros, Strategist

Fundamental Forecast for Gold: Bullish

Gold prices rallied for a third consecutive week with the precious metal up 1.8% to trade at 1349 ahead of the New York close on Friday. The advance comes amid continued weakness in the greenback with the DXY dropping to levels not seen since January of 2015. The march to fresh yearly highs been further fueled by the ongoing geopolitical tensions with North Korea and diminishing expectations for a Fed rate hike in December. But can the rally continue? The charts say yes, but not before a slight interruption.

Highlighting the economic docket next week will be the release of the August U.S. Consumer Price Index (CPI) followed by retail sales figures. Keep in mind next week is the blackout period for Fed speakers ahead of the upcoming quarterly FOMC rate decision on September 20th. While headline inflation is expected to uptick to 1.8% y/y, the core rate is expected to downtick to 1.6%. With the Fed essentially waiting on inflation to pick up, traders will be assessing the implications of a December rate-hike with markets now pricing less than a 30% chance the central bank will move on rates.

While the rally in gold has been quite impressive, prices are now approaching some longer-term objectives and even though the broader focus remains constructive, heading into next week the risk remains for some corrective price action before heading higher.

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  • A summary of IG Client Sentiment shows traders are net-long Gold - the ratio stands at +1.43 (58.8% of traders are long)- bearishreading
  • Long positions are 8.0% lower than yesterday and 0.2% lower from last week
  • Short positions are 3.6% lower than yesterday but 2.7% higher from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current Spot Gold price trend may soon reverse higher despite the fact traders remain net-long.
  • From a technical standpoint, the fact that long exposure has continued to wane fuels the argument for the broader uptrend.

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Gold Weekly

Gold prices gapped above the 61.8% ext at 1325 into the weekly open with a quick fill & reversal taking prices to fresh yearly highs. The advance challenged basic slope resistance on Friday before pulling back. The risk heading into next is for further weakness off this level but the broader outlook remains constructive – more

significant resistance is eyed at 1380/92.

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Gold Daily

The daily chart further highlights this level as the 2016 high-day close at 1355(high was registered at 1357). Note that momentum is still in overbought territory and the breach above the 1321/25 threshold is technically significant- this is still a strong up-trend. The focus remains higher while above that mark with a breach here ultimately targeting 1377/79.

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Gold 240min

In my last gold forecast we noted that our focus was, “higher while within this (channel) formation with bullish invalidation now raised to the monthly open at 1268. Interim resistance stands at 1295 backed closely by 1303- a breach there is needed fuel the next leg higher targeting 1321/25.”

Gold rallied through this level with prices breaching near-term channel resistance this week before coming back to test it as support. Look for immediate support along that slope (currently ~1335) with near-term, bullish invalidation now raised to 1321. A breach higher from here targets the 2016 high-close at 1366 backed by 1377/79. Bottom line: from a trading standpoint, I’d be looking for weakness early next week to offer more favorable long entries.

---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.