Gold Fundamental Analysis – Forecast for December 2016

Gold futures plunged in November as stock market investors reacted positively to the surprise election of Donald Trump as president of the United States. Stock investors liked his plans to rebuild the infrastructure of the U.S., modify the tax code, and protect American workers and industry.

Investors bought stocks with both hands, driving the major indexes to new all-time highs. This pressured gold futures because the asset doesn’t pay investors a dividend or interest. Basically, it’s just a bad investment during periods of rising stocks.

Investors also thought Trump’s plans were likely to lead to inflation. In order to counter the rise in inflation, U.S. Treasury yields rose sharply. Some investors also aggressively sold Treasurys and poured the proceeds into stocks.

Rising Treasury yields are also bearish for gold because gold doesn’t pay interest.

Higher U.S. interest rates also made the U.S. Dollar a more attractive investment. The dollar soared to a 13-year high in November, making dollar-denominated gold a less-desirable asset.

Finally, due to a slew of positive economic data, investors increased the chances for a Fed rate hike in December to about 95%. This was also bearish for gold prices.

February Comex Gold futures ended the month at $1173.90, down $103.00 or-8.07%.

Forecast

Technical as well as fundamental factors could play a role in the direction of gold prices in November.

Technically, the market is starting the month oversold. This doesn’t mean it’s ripe for a change in trend, but it could be ready for a strong short-covering rally. This would be triggered by a combination of profit-taking and aggressive, counter-trend bottom-picking.

The main range is $1055.20 to $1387.10. Its 50% and 61.8% retracement zone comes in at $1221.20 and $1182.00 respectively. This zone is controlling the long-term direction of the market.

Gold should see continuous pressure in December if it remains under this zone. It could trade sideways to higher if its holds between $1221.20 and $1182.00. Gold could turn bullish if enough buying comes in to drive the market through $1221.20.

The catalysts driving the market in December will be the usual suspects, U.S. Treasury yields, the U.S. Dollar and equity markets.

Rising Treasury yields should boost the dollar, putting pressure on gold or at least limiting its upside. Rising stocks will have the same effect because investors want to own either paper (stocks) or hard assets (gold).

Gold could rally if investors perceive the dollar as overvalued or gold as undervalued. Overall, the long-term trend is down, but I wouldn’t be surprised by a meaningful short-covering rally.