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Talking Points:
- Gold Technical Strategy: Longer-term bullish > $1,200; near-term aggressively bearish.
- A major support level on Gold is at $1,200; this is the 38.2% Fibonacci retracement of the Bretton Woods-fix to the 2011-high.
- If you’re looking for trading ideas, check out our Trading Guides.
In our last article, we looked at the chaos unleashed in the Gold market around the U.S. Presidential Election. After intially running higher on risk aversion as it became more obvious that Donald Trump was the likely winner, an out-sized reversal started at around midnight Eastern Time on the night of the election that, as of yet, hasn’t stopped. The Dollar has continued to run-higher, now testing 13-year highs as the ‘reflation’ trade has been getting priced-in to markets.
At the core of this assumption is the likelihood that the Fed will be hiking rates in December. Going into the elections, probabilities of a hike in December were at over 80%. On the initial news that Donald Trump may win, the Dollar sold off as this new bout of uncertainty may have caused the Fed to delay, again. But after a moving victory speech in which President-Elect Trump talked up the prospect of decreased regulation and increased infrastructure spend, equities markets began to rally, the Dollar began to re-strengthen and those themes have continued to drive through markets since last Tuesday.
Many are already aware of the inverse relationship between Gold and the U.S. Dollar (Gold is priced in Dollars, after all); but perhaps more pertinent to performance of Gold prices are inflation expectations for the U.S. economy. Inflation expectations feed into rates, which drives the Dollar which can then hit Gold prices. So we can draw the logical relationship that rising inflation expectations are a huge negative for Gold prices, and that’s precisely what we’re seeing right now on the back of ‘reflationary’ hopes around President-Elect Trump’s potential policies.
The bigger question at this point is the middleman between inflation expectations and interest rates, as the Federal Reserve has been extremely passive in the face of rising economic risks over the past 15 months. This happened in August/September of last year when China began to implode, and again at the beginning of 2016 when the ‘four rate hikes in 2016’ idea created risk-aversion the world-around. In each case, the Fed’s response was the same: More fast and loose monetary policy transmitted by commentary, expectations and/or projections. Each iteration of dovishness from the Fed has bolted Gold prices higher, and this is why Gold is ‘technically’ still in an up-trend for this year.
If the Fed capitulates from rate cuts again, this could bring bullishness back into Gold; but it doesn’t appear that we’re near that right now. The Fed has had a tendency to get dovish as stock prices get hit lower, what has cordially become known as the ‘Fed Feedback Loop.’ But with stock prices near all-time highs, with most economic data ‘not all that bad,’ there isn’t a compelling reason for the Fed to back away from hikes. This could bring further losses to Gold in the near-term.
After running above $1,330 on the night of the Presidential Election, Gold prices have moved all the way down to bounce off of a key Fibonacci level at $1,210, for a total run of -9.5%. The Fibonacci retracement that had helped to set near-term support is the 50% retracement of the December 2015 low to the July high; but just below this support is a longer-term zone of support that had helped to set the September swing-low.
At $1,200.51 we have the 38.2% Fibonacci retracement of the ‘big picture’ move in Gold prices, taking the low of $35 from the Bretton Woods-fix all the way up to the 2011 high (shown in Green below). This level had given a brief dose of resistance when Gold prices were shooting-higher in February, and then helped to set support in May.
Traders looking to get long Gold would likely want to confirm a legitimate case of support building before looking to buy off of this level. As we discussed last month, Gold prices have taken on a form of cyclicality as driven by FOMC expectations. It would appear that we’re still mired in a ‘negative cycle’ and that’ll likely stay until the Fed relents from rate-hike plans.
For traders looking to build bearish positions, potential resistance at the $1,250 level could be enticing for near-term swings lower.
Chart prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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