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Fundamental Forecast for Gold:Neutral

Gold prices fell for the third consecutive week with the precious metal down more than 2.5% to trade at 1247 ahead of the New York close on Friday. The losses come on the back of continued strength in the greenback with the DXY up nearly 0.9% as the focus now shifts to the Fed ahead of next week’s FOMC policy decision. Equity markets have also remained well supported throughout with all three major US indices trading higher into the close.

All eyes will be on the central bank next week with the Fed widely expected to hike interest rates by 25bps. The focus will be on the fresh quarterly projections on inflation, growth, and employment with the updated interest rate dot-plot of the utmost importance as traders weigh the outlook for monetary policy heading into 2018. Note that back in September, the dot-plot showed a median expectation that rates will be at 2-2.25% into next year with the longer-run (natural) rate steady at 3%.

Ultimately, the inflation outlook will likely be lead here as price growth (specifically wage growth) continues to persistently run below the Fed’s 2% target. Keep in mind that we also get the release of U.S. CPI figures just ahead of the policy announcement on Wednesday. The implication for bullion prices could be significant – remember that expectations for higher rates tend to weigh on the price of non-yielding assets like gold which does not pay a dividend. That said, tomorrow’s hike is largely priced in with markets largely calling for 1-2 hikes next year – the Fed dot plot (as of September) suggests 3-4 hikes. Look for changes in this spread to drive market reaction.

Last week we noted that, “the technical outlook heading into the December open allows for some further losses before risking major damage to the broader uptrend in bullion prices.” Indeed the losses have now taken prices to critical levels which if compromised, could change the broader outlook heading into the 2018 open.

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Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +3.96 (79.9% of traders are long)- bearishreading
  • Long positions are 0.2% lower than yesterday and 5.0% higher from last week
  • Short positions are 14.1% lower than yesterday and 10.4% 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 continue to fall. Retail is more net-long than yesterday but less net-long from last week and the combination of current positioning and recent changes gives us a further mixed Spot Gold trading bias from a sentiment standpoint.

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Gold Weekly

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

Gold prices have approached a key support confluence highlighted in our 4Q Gold Forecast at 1240/43. This region is defined by the 61.8% extension of the decline off the yearly highs and the 50% retracement of the December advance with the long-term 200-week moving average converging on up-slope support just lower. A break below this threshold would risk a larger set-back in prices with such a scenario eyeing initial weekly support targets at 1204/12.

Gold Daily

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

A daily chart highlights the break below a key threshold we’ve been tracking for months at 1263/67 where the 200-day moving average converges on a pair of Fibonacci measurements and the October / November range lows. Look for a reaction off 1240 heading into the FOMC next week

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Gold 240min

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

Gold Losses Drive Prices into Critical Support Ahead of FOMC Rate Decision

A closer look at near-term price action further highlights this support zone heading into the close of the week. Look for initial resistance at 1267 with a breach above basic trendline resistance extending off the yearly highs / 100-day moving average ~1286 needed to alleviate further downside pressure.

Bottom line: from a trading standpoint I’d be looking for either evidence of an exhaustion low into this support zone OR a breach above yearly trendline resistance before tempting long exposure here heading into the Fed next week. A break /close below this region would leave prices vulnerable for a decline toward 1219 and 1204/08.

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

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