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Fundamental Forecast for Gold: Bearish

Gold Talking Points:

Gold struggles to retain the advance from the 2018-low ($1160) as the U.S. Non-Farm Payrolls (NFP) report sparks a bullish reaction in the dollar, and the current environment keeps the precious metal at risk for further losses as the Federal Reserve appears to be on course to implement higher interest rates over the remainder of the year.

Looking ahead, attention now turns to the U.S. Consumer Price Index (CPI), with the updates anticipated to show the headline reading narrowing to 2.8% from 2.9% in July.

However, stickiness in the core rate of inflation may encourage the Federal Open Market Committee (FOMC) to increase the benchmark interest rate to a fresh threshold of 2.00% to 2.25% on September 26 as the gauge is expected to hold steady at 2.7% per annum in August.

Gold Prices Vulnerable to Sticky U.S Core CPI, Retail Sales

In addition, the Retail Sales report is projected to show another 0.5% expansion during the same period, and a batch of positive developments may fuel bets for four Fed rate-hikes in 2018 as ‘participants generally expected that further gradual increases in the target range for the federal funds rate would be consistent with a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective over the medium term.

In turn, gold remains vulnerable to further losses as the inverse relationship between the precious metal and the greenback continues to materialize, with the IG Client Sentiment Report still showing retail sentiment near extremes as 82.6% of traders are still net-long bullion.

Gold Prices Vulnerable to Sticky U.S Core CPI, Retail Sales

The ratio of traders long to short sits at 4.74 to 1 asthe number of traders net-long is 2.0% higher than yesterday and 0.8% higher from last week, while the number of traders net-short is 12.0% lower than yesterday and 3.0% higher from last week.

The slant in retail positioning offers a contrarian view to crowd sentiment, with current conditions warning of a further decline in gold as both price and the Relative Strength Index (RSI) snap the bullish formations carried over from the previous month.

Gold Daily Chart

Gold Prices Vulnerable to Sticky U.S Core CPI, Retail Sales

Downside targets are coming back on the radar for gold following the failed attempt to test the August-high ($1225). The lack of momentum to push back above the $1210 (50% retracement) to $1219 (61.8% retracement) area raises the risk for a move back towards 1172 (61.8% retracement) to $1177 (78.6% retracement), but need a break/close below the Fibonacci overlap to bring up the 2018-low ($1160), which sits just above the $1156 (61.8% retracement) hurdle.

For more in-depth analysis, check out the Q3 Forecast for Gold

--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

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Other Fundamental Forecast:

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Japanese Yen Forecast - The Japanese Yen Moves into the Tariff Conversation

Oil Forecast – Trade Wars and an Emerging Market Crisis Likely To Keep Oil Volatile

British Pound Forecast – Positive Momentum Will Continue to Drive Sterling Higher