Gold Fundamental Analysis – Forecast for October 2016

December Comex Gold futures went on a roller coaster ride in September, posting its high and low within the first four days of the month then spending the rest of the time swinging within this range. At the end of the month, the market was trading $1317.10, up $5.70 or +0.43%.

The price action during the month mirrored both the U.S. equity markets and the U.S. Dollar. Additionally, at times the market was driven by flight to safety buying and value buying.

Traders were buying gold between September 1 and September 7 after U.S. jobs growth came in below expectations, dampening the likelihood of an interest rate hike from the Federal Reserve later in the month.

Gold then sold off from September 7 to September 16 as traders digested the statements by Federal Reserve members before the pre-meeting quiet period began. At that time, Boston Fed President Eric Rosengren, and a voting member on the Fed’s interest-rate setting board, repeated his stance to move rates higher sooner rather than later. Federal Reserve Governor Daniel Tarullo also said in an interview that there was not need to raise rates right now due to concerns about frothy asset prices.

Gold formed a technical double-bottom when buyers came in at $1309.20 on September 16, slightly above the previous bottom and low for the month at $1305.50. This market action was related to position-squaring ahead of the Fed’s interest rate decision on September. This led to a spike to the upside that was triggered by the Fed’s decision to leave rates unchanged.

However, this rally fell short of the high of the month at $1357.60 after investors threw money at the stock market as investor demand for higher yielding assets made gold a less desirable asset.

FORECAST

Once again in October, gold investors are going to have to contend with the dichotomy of economic easing and lower interest rates overseas, and the possibility of rising interest rates in the U.S. This theme will be the primary catalyst for the price action this month.

Sometime during the year, gold lost its status as an investment and is now being used primary as a hedge against uncertainty, or a place to park your cash when you aren’t sure about the outcome of holding on to a risky assets. Therefore, we expect gold to continue to mirror the movement in the stock market throughout the month.

Essentially, we are going to follow a plan dictated by demand for higher risk assets. When investors want risk and return, they are going to buy stocks and gold will likely move lower. When investors feel like shedding risk then gold will become an attractive place to park their excess cash.

Gold will also be used at times for protection like it was late last month during the Deutsche Bank mini crisis. In my opinion, the correlation between gold and the U.S. Dollar is not that strong right now. However, we still should see some negative reactions to reports that keep the Fed on a path towards raising rates in December. One such time should be on Friday, October 7 when the U.S. releases its latest Non-Farm Payrolls data. Expect volatility at that time.