Gold Fundamental Forecast – December 8, 2016

Gold traders ignored the sharp rise in U.S. equity prices on Wednesday and focused on the weaker U.S. Dollar ahead of Thursday’s European Central Bank meeting, helping to drive the market higher into the close. The move also suggests that next week’s Fed rate hike has already been priced into the market.

February Comex Gold futures closed at $1177.50, up $6.10 or +0.52%.

The market has been under tremendous selling pressure since early November, posting its biggest monthly decline in more than three years. The sell-off was driven by fears of a U.S. rate hike, a stronger dollar and increased appetite for risk. The weakness was aided by poor demand from China and India.

Forecast

February Comex gold is at an important point on the chart. The main range is $1055.20 to $1387.10. Its 50% to 61.8% retracement zone is at $1221.20 to $1182.00. This zone is essentially control the direction of the market.

Based on the last close at $1177.50 and Wednesday’s price action, the direction of the market today is likely to be determined by trader reaction to $1182.00. Overcoming this level could trigger an initial rally into $1190.20. If the buying continues then look for the rally to extend into $1197.40.

On the downside, falling back below $1174.40 will indicate that the buying is not that strong.

If you’re looking for major reasons why the market could rally then get in line. There aren’t any major reasons, other than it is cheap. Now that the Fed has tipped its hand, short-sellers apparently feel that there isn’t much downside left at this time.

It’s obvious from the chart that $1055.20 is a major downside target, but the only way to get there is to sell weakness and the major players don’t like to short weakness. Therefore, I wouldn’t be surprised by a short-term rally. It will probably be triggered by buy stops, short-covering and some aggressive, counter-trend buying.

What encourages me the most about the upside potential of this market is that Wednesday’s rally took place on a day when the stock indexes rose about 1 percent. If investors can start to ignore the normal relationship between gold and stocks, then we could we looking at the beginning of a nice rally.

Watch the price action and read the order flow at $1182.00 today and over the near-term. Trader reaction to his level will set the tone of the market. If the buying is strong enough, we could see a quick rally into $1197.40 to $1206.50.

Be careful playing the long side if $1174.40 fails as support. This will be a sign of weakness.