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Gold Prices Are Dropping Like a Rock: Support as Mere Speed-bumps

Gold Prices Are Dropping Like a Rock: Support as Mere Speed-bumps

2016-11-30 20:37:00
James Stanley, Currency Strategist
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  • Gold Technical Strategy: Gold prices have broken down to another support level at $1172.07.
  • The prior up-trend from the first-half of 2016 is very much in question as Gold prices continue falling deeper.
  • If you’re looking for trading ideas, check out our Trading Guides.

In our last article, we looked at another significant break of support in the Gold market as the previously-strong $1,200 level was taken out fairly quickly. As we advised, buyers needed to be very aware, as USD-strength had run rampant and there was little sign of slowdown as we moved into the Thanksgiving holiday in the United States. After running up to a quick swing-high at $1,337 on the initial risk aversion on the night of the election, the Dollar reversal took over and has, since, driven Gold prices lower by over $160 an ounce. This is a move of 12.26% in a mere three weeks…

Gold Prices Are Dropping Like a Rock: Support as Mere Speed-bumps

Chart prepared by James Stanley

The most recent support inflection has shown up at a rather key level at $1,172.07, which is the 61.8% Fibonacci retracement of the recent bullish move, taking the lows from December of 2015 up to the July highs at $1,375. To be sure, some traders will likely attempt to use this to support reversal plays, but this may be a bit early for such a theme as, frankly, there is still little evidence that this recently re-fired scenario of USD-strength is ready to abate.

As we’ve been discussing throughout 2016, price action in Gold has been very cyclical. The bullish phases have been fast and violent, often taking place around Central Bank actions or activities. This is similar to what we saw in early February when the Fed began to relent on the whole ‘4 rate hikes in 2016’ idea. This is also similar to what we saw through the first half of this year as the Fed was getting more dovish for forward-looking rate expectations. Each dovish moved brought the Dollar lower, and this provided another quick and violent pop into Gold prices.

But the Fed hasn’t been dovish for all of this year, have they? Each time the Fed has ramped up the hawkishness, as we saw throughout May of this year and again around August (Jackson Hole) and September (Septemober FOMC), the Dollar has strengthened and this has brought on another prolonged ‘negative cycle’ in Gold prices.

The issue with top-side continuation in Gold prices right now is that it’s difficult to imagine how the Fed might ramp-up dovishness with the post-Election backdrop. While matters can change incredibly fast, it appears as though we have the ‘reflationary’ trade being priced-in and if this is the case, the ‘negative cycle’ in Gold prices can continue for a while, not too dissimilar to what we saw from 2011-2015. The bullish trade in Gold probably won’t be attractive again until the Fed tempers hawkishness which, frankly, they have no reason to do right now. They’ve wanted to normalize policy for years now, and the context with which the U.S. Presidential Elections are helping to redefine economic expectations could provide such a situation for the bank, and this will likely bring on prolonged pain for Gold prices.

For those that are looking for support, just underneath our current inflection we have a trend-line projection from a prior channel that had lasted for over two years in Gold (shown in blue, below).

For those looking to initiate short positions in Gold, resistance at $1,200 could open the door for such a play, as this has been a widely-watched level that helped to set support in May of this year.

Gold Prices Are Dropping Like a Rock: Support as Mere Speed-bumps

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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