Fundamental Forecast for Gold:Bearish
- The rout in US equities finally spurred safe haven demand for the precious metal
- Gold will likely look to equity sentiment to drive price action next week barring significant geopolitical developments
- The metal now trades above the downtrend that began in mid-April which now acts as support
Gold Price Rides on Equity’s Rebound
Gold posted a huge rally this week. Propelled by safe haven demand, the precious metal rocketed through multiple key resistance levels and now trades around $1220. Last week, we mentioned the possibility of safe haven demand being brought about by an equity rout. Unsurprisingly, a 1,368 point drop in the Dow over two days was enough to create appeal for the asset’s key attribute.
Gold Price Chart Hourly, October 5th- October 12th
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Although gold benfitted from safe haven demand this week, it may be short lived. Friday saw a mixed trading day for US equities result in a green close. In Europe, equity losses were minimal. These developments suggest equities are regaining their feet and thus the drastic flight to safety will wane. In the upcoming week, equities will be the key deciding factor for gold’s performance and they seem to be normalizing.
With that in mind, there were some other fundamentally bearish developments that flew under the radar this week. Overshadowed by plummeting equities, US CPI data was released and fell short of expectations. Although the miss is minor, it showcases lower than expected inflation. Lower inflation could weigh on gold’s use as an inflation hedge and thus act as a headwind for gold’s price.
View our Economic Calendar for US CPI and other important data releases.
Gold Price Chart Daily, March – Present
As we look to the technical picture, the equity rout generated enough demand to push gold above trend line resistance from mid-April. Moving forward, that resistance should act as support. More immediate support can be found at 1213.55, the 50% fib level from December 2015. Areas of resistance are less immediate with a minor Fibonacci level at $1239.
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Retail trader data shows 89.5% of clients are net-long with the ratio of traders long to short at 8.52 to 1. The number of traders net-long is 11.4% higher from last week and traders net-short is 29.7% lower than last week. Since we typically take a contrarian view to crowd sentiment, it could suggest gold is headed lower next week.
With another drastic equity collapse unlikely, disappointing CPI figures, and bearish sentiment data, it would seem gold is due to retrace some of the gains it posted this week. For these reasons, the fundamental forecast for gold in the upcoming week is bearish.
--Written by Peter Hanks, Junior Analyst for DailyFX.com
Contact Peter on Twitter at @PeterHanksFX
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