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Gold Fundamental Analysis – Forecast for the Week of December 19, 2016

By:
James Hyerczyk
Updated: Dec 18, 2016, 10:44 UTC

Gold prices fell last week to a 10 ½ month low before bounding slightly on Friday. The catalyst behind the sell-off was a widely expected interest rate

gold-weekly

Gold prices fell last week to a 10 ½ month low before bounding slightly on Friday. The catalyst behind the sell-off was a widely expected interest rate hike by the U.S. Federal Reserve and a surprise announcement that the central bank may raise interest rates three more times in 2017. This was up from the two increases forecast at its September meeting.

The new Fed projections, combined with President-elect Trump’s plans to boost the economy through fiscal stimulus, drove up U.S. Treasury yields, making the dollar a more desirable asset and dollar-denominated gold a less desirable investment.

The dollar was also driven higher by talk that the Euro would move to parity with the Greenback within 12 months. Furthermore, the interest rate differential between the U.S. and German 10-year bond yields reached its widest since at least 1990, further supporting the higher dollar while pressuring gold futures.

Rising stock prices also pressured gold since the two compete for the same investment dollar. Gold doesn’t pay interest which makes Treasurys a more attractive investment, or a dividend which sends investors into equities.

In major economic news last week that lent support to the dollar, U.S. retail sales barely rose in November, according to the Commerce Department. Retail sales edged up 0.1 percent after two straight months of strong gains. October retail sales were revised downward.

The Labor Department said on Thursday its Consumer Price Index rose 0.2 percent last month. This was in line with expectations. The CPI advanced 0.4 percent in October. In the 12 months through November, the CPI increased 1.7 percent, the biggest year-on-year gain since 2014.

The housing sector took a hit at the end of the week with Building Permits coming in at 1.20 million units versus a 1.24 estimate. Housing Starts fell to 1.09 million units versus 1.23 million units.

February Comex Gold closed the week at $1137.40, down $24.50 or -2.11%.

weekly-comex-gold
Weekly February Comex Gold

Forecast

Although the trend is down on the charts and there is room to break with $1055.20 the next major target, other technical indicators show the market as oversold. This being said, we could see a technical bounce based on these factors alone.

However, there is also talk amongst traders of a possible squeeze on dollar liquidity. This could cause the U.S. Dollar to weaken which would be supportive for the U.S. Dollar.

We also have the possibility of profit-taking and position-squaring ahead of the Christmas and New Year’s holiday. Thin holiday volume will open the door to possible counter-trend volatility spikes.

A developing story late Friday could also be a positive influence on gold this week. Late Friday, gold prices rose to session highs after U.S. officials told Reuters that a Chinese warship has seized an underwater drone deployed by a U.S. oceanographic vessel in the South China Sea.

So while the trend may be down and the major fundamentals overwhelmingly bearish, there are a few short-term develops that could help produce a counter-trend rally this week.

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About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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