Gold Fundamental Forecast – September 27, 2016

Gold prices recovered from early session weakness to close higher on Monday. The week began with sellers dominating the trade and buyers seemingly questioning the strength of last week’s rally. Traders were surprised at the early weakness because the U.S. Dollar and U.S. equity markets were trading lower. This combination usually provides support for gold prices.

Shortly before the end of the session bargain-hunters took advantage of this anomaly and bought gold driving it higher into the close. The December Comex Gold futures contract finished at $1344.10, up $2.40 or +0.18%.

Uncertainty was the theme of the session on Monday as many gold traders took to the sidelines ahead of the key OPEC meeting in Algiers and the first U.S. presidential debate. Investors shed risky assets ahead of the events, but the money flowed into U.S. Treasurys and the Japanese Yen for protection. The move seemed to disappoint gold investors early in the session.

The biggest disappoint was gold’s inability to rally despite the weaker U.S. Dollar. This could be sending a signal to traders that the correlation between these two asset classes may not be working at this time. This is likely to further confuse gold investors, making them less likely to want to hold the precious metal for protection.

FORECAST

Gold could continue to drift sideways over the near-term until it can find investors who want to own it. Although some of the recent selling can be attributed to aggressive shorting pressure, the majority of the selling can be attributed to long liquidation.

Earlier in the year, gold received support from investors because of weakness in the stock market and crude oil. Since their bottoms in late January, gold has seen very little gain from its initial rally while stocks are lingering near all-time highs. Crude oil in the meantime is struggling, but trading well above its January low and marginally higher for the year. Gold is up for the year, but has been rangebound since early July.

The series of lower tops and lower bottoms on the gold daily chart suggests the market may be getting ready to roll over to the downside. This is not likely to occur, however, until the psychological $1300.00 level is taken out with conviction.

At the same time, the $1400.00 level appears to be magical resistance. Given the $100 range between the support and resistance levels, $1350.00 appears to be a fair price – not too hot, not too cold. And this pretty close to where gold is currently trading.

The price action in the metals this year shows a clear pattern of hedge fund buying. Unfortunately, they have been moving from gold, to silver, to platinum, to palladium, looking for value so that they can get some kind of a return.

Until the fund traders return to gold with big money to spend, gold is likely to drift sideways on both sides of $1350.00. Hedge fund managers like all of us are looking for a compelling story to encourage us to buy gold.