Gold Fundamental Forecast – October 27, 2016

Gold futures had a funny session on Wednesday. Stocks continued their slide, the U.S. Dollar was lower, but buyers failed to show up to support the market. On Tuesday, it showed signs of breakout to the upside, but that rally stalled. Wednesday’s action must have been frustrating for the bullish traders.

We may have learned that investors aren’t interested in buying strength. We should find out this week if they still like the long side on weakness. Perhaps traders are content with holding the market in a range. This would be a sign that they accept that interest rates are likely to rise by December.

If the dollar continues to weaken along with U.S. equities, then I cannot help but believe that this news will eventually be constructive for gold prices.

Additional bullish factors are increased holiday demand from India and strong ETF buying. A recovery in physical demand will be necessary to build a solid foundation for the next rally. Holdings of the SPDR Gold Trust, rose 0.34 percent to 956.83 tonnes on Tuesday from 953.56 on Monday.

Forecast

Despite Wednesday’s confusing price action, I have to think that continued pressure on gold and the equity markets, will eventually lead to renewed buying in gold. However, we’re going to need a big injection of fresh money to stimulate the next rally.

The hedge funds may out of gold after the recent break, having moved their money into crude oil, natural gas and coffee. Perhaps further liquidation in crude oil and natural gas will free up enough cash to invest in gold over the near-term.

If new money doesn’t show up soon, current speculative longs may just throw in the towel on the upside especially if U.S. Treasury yields start to climb again. No one wants to sit in a market that doesn’t “pay to play”.

Switching to the technical side, the price compression between $1260.10 and $1277.50 suggests investor indecision and impending volatility. So I believe volatility is getting ready to return, however, I’m not sure about the direction at this time. I know the overall fundamental story, but the price action is what you want to trade.

That being said, be prepared to trade both sides of the market because once gold starts moving, the price action is going to be fast and furious. On the upside, the next major target comes in at $1295.70. A sell-off is likely to trigger a move into perhaps $1218.50.

I think the catalyst will be a decisive move in Treasury yields. They are going to be sensitive this week to Thursday’s Durable Goods report and especially Friday’s Advance GDP. Next week will feature a Fed meeting on November 1-2 and the next Non-Farm Payrolls report on November 5.

I can say with conviction that the longer this market stays in a range, the odds of a relatively large move increase.

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