Gold Fundamental Forecast – December 19, 2016

Gold climbed above the previous day’s low on Friday to post a small gain for the session heading into the weekend. The price action could also be related to oversold conditions, profit-taking or position-squaring ahead of the Christmas and New Year holidays.

February Comex Gold futures closed at $1137.40, up $7.60 or +0.67%.

The longer-term downtrend continues to be influenced by expectations of higher Treasury yields. Essentially, the Fed’s hawkish outlook for next year leaves a fairly negative picture for gold.

Short-term, you have to dig deep for positives. One could say that last week’s interest rate hike was widely expected so that shouldn’t be a factor. We could also say that the Fed seldom delivers all of its projected rate hikes. Although the bears may argue that the Fed is finished with the “one and done” rate hike and could actually raise rates more than the three times they have forecast.

Forecast

Gold moved to its high for the session late Friday after Reuters reported that a Chinese Navy warship seized an underwater drone deployed by an American oceanographic vessel in international waters in the South China Sea.

This triggered a formal diplomatic protest from the United States and a demand for its return, according to a U.S. Defense Department official.

On Saturday, the Chinese government said it will return the U.S. naval drone. As of early Sunday, this is still the plan.

However, since the incident did move the markets on Friday, I think traders are going to want to see if this escalates into a major issue. It could be something that dissipates over the weekend or early in the week, or something that gains momentum throughout the week.

On Monday, the direction of gold prices are likely to be dictated by the movement in U.S. Treasury yields, the U.S. Dollar and U.S. equity markets. We also begin Christmas Week, which could mean below average volume. Investors have to be prepared for counter-trend moves and volatility spikes if the bigger traders (banks, institutions, hedge funds) decide to pack it in early.

Gold prices will rise if Treasury yields fall. This will encourage profit-taking in the U.S. Dollar. If the Euro and Japanese Yen gain ground then stocks are likely to feel pressure. This will also be supportive for gold.

Gold prices will continue to decline if Treasury yields continue to rise. This would underpin the dollar and likely bring some fresh buying into the stock market.

There are two wildcards this week that could trigger a strong upside response from gold. The first is the drone incident with China. The second is the U.S. Electoral College vote. The odds are that the Electoral College will vote Trump into office. However, if it doesn’t then there are going to be some major problems. This could lead to a huge sell-off in the stock market and a massive spike to the upside in gold.

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