Gold Fundamental Forecast – December 13, 2016

Gold futures closed higher on Monday as investors reacted to a weaker U.S. Dollar and stock prices. The market also recovered after U.S. Treasury yields fell from their highs. Short-covering and profit-taking were the primary drivers of the rally late in the session, but it may have been aggressive bottom-picking and counter-trend buying that helped put in the low for the day.

February Comex Gold futures finished the session at $1165.80, up $3.90 or 0.34% after recovering from a 10-month low at $1152.50.

Forecast

There’s not much economic news for gold trader’s to react to on Tuesday so the primary focus will continue to be on Wednesday’s U.S. Federal Reserve interest rate decision and monetary policy statement.

The headline is not going to be that important to the price action since there is about at 95% to 98% chance for a 25-basis point rate hike. This means it has already been priced into the gold market.

Like at this time last year when the Fed raised rates for the first time in 10 years, gold traders will be watching the Fed’s forecast for future rate hikes.  We already know that Treasury investors believe there will be inflation. However, we’re going to need the Fed to confirm that these investors got the future trend in interest rates right.

If the Fed doesn’t acknowledge the possibility of increased inflation, given the rise in oil prices and the market’s reaction to Donald Trump’s economic plans, with predictions of at least two rate hikes in 2017 then the U.S. Dollar could sell off. If the dollar weakens then look for gold prices to firm over the near-term.

The upside for gold will be limited, however, if stocks continue to produce new all-time highs.

Start preparing for volatility on Wednesday. Gold is getting close to a minor breakout over $1171.40. However, the bigger rally is likely to occur if buyers can overcome the resistance at $1182.00. This is the trigger point for a $15 to $25 rally.

On the downside, other than aggressive counter-trend buying, I don’t know what is holding up the gold market since the next major support doesn’t come in until $1055.20. This price was reached a year ago. Given the strength in the U.S. Dollar, stock indexes and rising Treasury yields, one would think that gold would be trading at least at this level at this time.

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