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Gold Prices Punished as the Bullish Thesis Dies a Little Bit More

Gold Prices Punished as the Bullish Thesis Dies a Little Bit More

James Stanley, Senior Strategist

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  • Gold Technical Strategy: Bearish. Hawkish Fed will likely continue-driving USD-higher and Gold-lower; at least until FOMC relents on rate-hike plans (recursion of this January/February). .
  • As the Fed got more-hawkish with future-guidance at yesterday’s meeting, Gold prices have little bid support and likely aren’t done falling in the near-term.
  • If you’re looking for trading ideas, check out our Trading Guides.

In our last article, we looked at the continued down-trend taking place in Gold prices as Dollar strength continued in a rather relentless fashion. As we’ve been discussing throughout this year, Gold prices have very much been driven by Fed policy or implications around potential policy moves.

In December of last year, Gold prices were in a precarious state after having lost 45% in the four years prior. When the Fed hiked rates for the first time in over nine years last December, Gold prices had just put in another test of support at the $1,045-level. But within two weeks, global markets had begun to collapse as the cocktail of ‘normalized policy’ in the United States combined with continued-implosion in Chinese equity markets and even deeper losses in Oil made for a threatening backdrop for the global economy as we came into the New Year.

As global equities put in collapse-like moves to open 2016, Gold prices began to run-higher on the implication that the Fed would relent from their ebullient rate-hike plans for 2016. On February 11th, that’s precisely what’s happened; and in March we saw the Fed reduce their expectation for future rate hikes and this is when Gold prices were ‘free to fly’ higher.

Gold Prices Punished as the Bullish Thesis Dies a Little Bit More

Chart prepared by James Stanley

Gold prices rallied by 31.5% from that December 2015 low to this year’s high, set in July just after the Brexit referendum. But also taking place in July was the increasing and rather persistent hawkishness from the Federal Reserve; highlighted by the Fed going ‘less dovish’ at their July meeting, then going even more-hawish for near-term hikes at the Jackson Hole Economic Symposium, followed by the blistering rally in the Greenback around the U.S. Presidential election.

Each of these have served to re-strengthen the Dollar; and now with USD sitting at fresh 14-year highs after the Fed just made another hawkish-move on future guidance and Gold prices are in a beleaguered state as they drive further-lower towards fresh lows.

So, it would appear that the bullish thesis that drove Gold prices up by 31% in the first half of this year is dying if not already dead-altogether. The Fed wants to hike rates, the backdrop appears to be getting more-accommodating for such a scenario, and this can bring on even-deeper losses to Gold prices, at least in the near-term.

So this would bring on a near-term bearish bias in Gold prices. The run-higher after this most recent Fed meeting appears to still be taking place with the U.S. Dollar continuing to drive to fresh-highs. This has brought on a support level in Gold around the $1,125 area, which is a confluent zone of support as we have a minor psychological level as well as the 76.4% Fibonacci retracement of the 2016 bull-move at $1,124.09.

On the resistance-side of the equation there are a series of levels that can be used for re-entry or stop placement for the bearish move; and traders would likely want to proceed with each level based upon how aggressively they want to treat the move. For those looking for quicker, more aggressive entries, the prior support-swing around $1,135 could be interesting. A bit deeper at $1,144 we have a prior iteration of resistance that could also become usable. At $1,155 we have a longer-term Fibonacci level as well as a very recent support-swing; and at $1,172.07 we have the 61.8% Fibonacci retracement of the 2016 bullish-move in Gold prices.

The prior swing-high at $1,188.10 could be assigned as an invalidation level for the bearish move with secondary invalidation assigned to the confluent level at $1,200.51.

Gold Prices Punished as the Bullish Thesis Dies a Little Bit More

Chart prepared by James Stanley

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

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