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Gold Prices Probably Haven't Bottomed-Out Yet

Gold Prices Probably Haven't Bottomed-Out Yet

2016-12-07 21:00:00
James Stanley, Strategist
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  • Gold Technical Strategy: Bearish; Gold prices set another fresh near-term low on Monday.
  • At issue behind the Gold move is the prospect of ramped-up Fed hawkishness at next week’s FOMC meeting, and this can bring more pain to Gold prices.
  • If you’re looking for trading ideas, check out our Trading Guides.

In our last article, we looked at how Gold prices have been dropping like a rock since the U.S. Presidential Election. After initially moving up to a quick swing-high at $1,337 on the initial risk aversion on the night of the election, Gold prices have broken down by as much as -13.5% in the month since. And as stock prices continue to drive-higher as the world cheers the prospect of the return of the ‘reflation’ trade, Gold prices have continually been punished by the prospect of higher rates of inflation, and higher interest rates that would likely come in response to those rising inflationary forces.

Or to put more simply: What happened in Gold prices from the major top in 2011 until the lows in December of 2015 has been happening in a much more short-term, hyperbolic-like scale. Earlier in the year when the Fed capitulated on the whole ‘four rate hikes in 2016’ theme, Gold prices popped-higher with reckless abandon. Gold prices were up by 31.4% from the December low into the July high. But around that high-point in July, something changed: The Fed began to more aggressively talk up the prospect of rate hikes again. Since then, matters have not been the same.

Gold Prices Probably Haven't Bottomed-Out Yet

Chart prepared by James Stanley

In October, some off-the-cuff Fed comments prodded the Dollar-higher under the presumption that rates might be moving up sooner rather than later; but it was the massive rally around the U.S. Presidential election that’s driven Gold prices into a beleaguered state. The extension of that rally, morphing into the ‘reflation trade’ could make for an even more forgiving backdrop for the Federal Reserve to attempt to firm rate expectations higher, and this could bring-on even more losses to Gold.

So, at this point, it’s rather difficult to hypothesize a bullish thesis for Gold without the Federal Reserve allaying some element of dovishness for next year. A hike at the bank’s next meeting in December is largely assumed, and the bank’s stance for 2017 and thereafter will likely be the primary driver around that next Fed meeting. But matters can change very quickly, especially when we’re talking about an international market like Gold, and it’s when a trend seems extremely one-sided that the trader should be most cautious as those underlying assumptions can significantly change the picture of price action in the pair.

For traders that want to look for short-side continuation, resistance can be sought out at $1,180.10 (most recent swing-high), $1,188.10 (prior swing-high), and at $1,200.51 (long-term Fibonacci level, May swing-low in Gold). Should prices break above $1,210, traders would likely want to abandon the bearish stance on Gold.

Potential support levels on Gold can be sought at prior price action swings of $1,165,35, $1,160.55 and again at $1,156.86. A long-term Fibonacci level is at $1,155.12 (61.8% retracement of the 2008-2011 move), and should this come into play, traders would likely want to expect some element of pause in the down-trend; and this can function as a top-end profit target for bearish-continuation plays.

Gold Prices Probably Haven't Bottomed-Out Yet

Chart prepared by James Stanley

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

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