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Fundamental Forecast for Gold:Bearish

Gold Talking Points:

  • Gold vulnerable to a breakout lower as sentiment sours and safe haven demand wanes
  • Markets have already priced in a hike at next week’s Fed rate decision
  • Retail positioning remains bullish with 87% of clients net-long

Gold Price Beholden to Trend Lines

Gold posted a moderate rally this week, trading higher until Friday when the metal surrendered earlier established gains. Heading in to Friday’s close, gold is set to close only slightly above the week’s open. Also on Friday, the hourly chart reveals multiple tests of short-term support which dates back to mid-August.

Gold Price Chart 60-Minute Time Frame, September 14th – September 21st

Gold Price Headed for a Break, may Turn Lower on Sour Sentiment

Together with the resistance posted from gold’s decline beginning in April, the metal is quickly running out of room to trade within the two levels. Next week will see a significant development in the metal’s price when a break occurs.

Look for events like the Fed’s Rate Decision on our Economic Calendar.

A break lower would likely be stalled by the support dating back to December 2015, around the $1180 level. To the upside, gold will face resistance at the 50% Fibonacci level around $1209. A break higher would likely need a significant fundamental development to carry through with conviction, which is rather unlikely with a quiet economic calendar this next week.

Gold Price Daily Time Frame, Year-to-Date

Gold Price Headed for a Break, may Turn Lower on Sour Sentiment

However, one notable event is present Wednesday. The Federal Reserve is due to announce their decision on the interest rate range which currently rests at 1.75% to 2.00%. Although the event will be watched closely by investors, markets have already priced in a hike. Falling in line with the current trend of 25 basis point hikes, CME futures have the probability of an increase to 2.00% to 2.25% in the high 90’s.

Gold Price Headed for a Break, may Turn Lower on Sour Sentiment

Gold’s Limited Upside

Historically, gold demand wavers as equities provide strong returns. As US equities push to record heights, gold interest should dip. It could be argued the ongoing trade wars should stoke some safe haven interest but this has not been seen in the past few months, with gold posting a multi-month decline. Strong equities and waning safe haven demand has left gold the “odd man out” lately, providing few reasons for a determined move higher.

Gold Price Headed for a Break, may Turn Lower on Sour Sentiment

Conversely, retail positioning at IG remains net-long on gold. This week saw positions shift from 85% long to 87% long and because we typically view client sentiment as a contrarian indicator, gold prices may continue downward.

View how our clients are positioned on gold and other assets.

All in all, it looks as though gold is positioned for a break lower. Considering the limited upside potential, waning safe haven demand, strong equities, and priced in Fed decision, we could see gold test support dating back to 2015 in the upcoming week.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact Peter on Twitter at @PeterHanksFX

DailyFX forecasts on a variety of currencies such as the US Dollar or the Yen are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introduction to the Forex market, check out our New to FX Guide.

Other Weekly Fundamental Forecasts:

New Zealand Dollar Forecast - Fed, RBNZ Risk Derailing Remarkable New Zealand Dollar Recovery

Japanese Yen Forecast - JPY Bears Eye 113 Level

Oil Forecast – Oil Firms Ahead of Algiers OPEC Meeting That May Set Stage for Q4

British Pound Forecast – Bullish Sentiment Erased by Brexit Impasse

US dollar Forecast – US Dollar May Resume Rising Trend After FOMC Rate Decision