Gold Fundamental Forecast – December 7, 2016

Gold futures traded lower on Tuesday, but the market saw limited price action, probably due to position-squaring after Monday’s volatile two-sided trading session. The dollar-denominated asset was likely underpinned by the weaker U.S. Dollar, but the upside may have been limited by firm U.S. Treasury yields and rising equity indexes.

February Comex Gold futures finished the session at $1171.40, down $5.10 or -0.43%.

The U.S. Dollar basically drifted on Tuesday after early session weakness. Sellers were reluctant to take the market lower ahead of Thursday’s European Central Bank meeting and next week’s U.S. Federal Reserve interest rate decision. Traders have priced in about a 95% chance of a 25-basis point rate hike.

U.S. Treasury yields were mixed but remain near their highs for the month. The yield on the benchmark 10-year Treasury notes was lower at around 2.389 percent, while the yield on the 30-year Treasury bond was higher at 3.076 percent. Higher yields tend to weigh on gold prices because they make the U.S. Dollar a more attractive investment.

U.S. equities, a competing asset with gold, rose on Tuesday, as the post-election rally continued. Investors have been taking money out of gold and investing in the stock market.

In economic news, third-quarter productivity rose at an annualized rate of 3.1 percent, according to the U.S. Labor Department. The U.S. trade deficit, however, widened to $42.6 billion. October factory orders, rose 2.7 percent, slightly above the 2.6 percent estimate.

Traders digested the news and determined they would have little impact on the price action.

Forecast

The direction of gold prices will be determined by the same factors that have been driving the market lower since November 8. These factors include rising Treasury yields, a strong U.S. Dollar and a bullish stock market.

Despite some technical indicators identifying oversold conditions, gold is likely to remain under pressure as long as the Treasury yields and the dollar remain strong. If these two factors weaken then we could get a bounce from current price levels, but the stronger stock market will likely limit any gains.

The long-term charts indicate there is plenty of room to the downside if sellers decide to increase pressure. The next major downside target is $1055.20.

The key level on the upside is $1181.00. Overtaking this level could firm up prices. If enough counter-trend buyers come in to support the move then we could see a short-covering rally into $1190.20 then $1197.40.

I think a short-covering rally would be welcomed because it would allow bearish traders to increase their short positions at more favorable levels.

If there is a “Santa Claus” stock market rally and the major indexes take off to the upside into the end of the year, then I believe gold will plunge to last December’s bottom at $1055.20.