Gold Fundamental Forecast – September 26, 2016

Gold futures finished lower on Friday as investors took profits ahead of the week-end and in response to a rebound by the U.S. Dollar. Nonetheless, the market still managed to post a 2.40% gain for the week. Traders were also continuing to assess the impact of last week’s policy decision from the Bank of Japan and U.S. Federal Reserve. December Comex Gold futures finished the week at $1337.40, down $3.00 or -0.17%.

My assessment is that if it weren’t for the Fed, gold futures would have breached the psychological $1300.00 level and ended up about $30.00 lower. Instead, bullish gold investors have the central bank to thank for last week’s solid gains.

The market posted its biggest weekly advance since July after the Fed opted to leave interest rates unchanged while cutting its economic forecast and reducing the number of expected rate hikes in the future.

Although the daily chart pattern appears to show a massive short-covering rally took place, data from Bloomberg showed that investors added at least 6.3 metric tons to exchange-traded funds backed by gold last week.

Since early July, gold has been trending lower after Fed rate hike concerns helped wipe out nearly all of the gains from the quarter. Yes, that’s right because on June 30, the December futures contract closed at $1327.40 and on September 1, it had reached a low of $1305.50. Since then gold has bounced back a little, but it is still only up $14.00 since the end of June.

The price action suggests that the aggressive buyers from earlier in the year may be gone, but there are new buyers coming back in who are willing to defend the market on corrections into value zones. One may even argue that the rally earlier in the year was overdone since it came on the heels of the last Fed rate hike. So we’ll be watching this week to see if gold can follow-through to the upside after last week’s gains.

FORECAST

The gold market could prove to be interesting this week. On one hand, we have the technical analysts who cite the series of descending tops and bottoms as two reasons why we can expect to see lower prices.

We also have those who believe that since it is a competing asset for investment capital with stocks, that its upside will be limited as long as the equity indices remain at or near all-time highs.

Then we have the bulls who are saying that as long as the Fed is being cautious about raising rates, and while it is cutting its economic forecasts and reducing the number of rate hikes in the future, the gold market has strong upside potential because after all, these legitimate concerns are enough to raise uncertainty levels which makes gold a good investment.

I tend to look at gold this way. It’s range bound. I think that as long as there is demand for higher yielding assets like stocks or the Australian Dollar, gold’s upside will be limited. However, gold prices will continue to be supported if the U.S. Dollar remains under pressure because of a steady flow of foreign demand.

So the best thing to do right now, barring any dramatic move to the upside by the dollar or a huge break by the stock market is to determine your range for gold and sell rallies into resistance and buy breaks into support and continue to do this until proven otherwise. The days of breakout moves to the upside or downside may be over during the short-run until the Fed finally starts on its path towards gradually raising rates.