Price of Gold Fundamental Daily Forecast – Falling Dollar Continues to Chase Out Weak Short-Sellers

Gold futures are trading higher for a third session this week with buyers of the dollar-denominated asset finally acknowledging that the weaker U.S. Dollar is a good thing. The catalyst behind the move appears to be fresh optimism over a U.S. stimulus deal.

Hopes of a stimulus deal and vaccine progress pushed the U.S. Dollar to a near 2-1/2 year low, making bullion cheaper to holders of other currencies.

At 09:05 GMT, February Comex gold futures are trading $1843.60, up $13.40 or +0.73%.

Early Signs US Stimulus Bill Gaining Traction

Although Congressional lawmakers were unable to agree on a fresh U.S. coronavirus relief package, early signs indicate that a $908 billion bipartisan proposal could be gaining traction as a negotiating tool. Just the mention of renewed stimulus talks this week has been enough to shake out some of the weaker shorts, leading to the current short-covering rally.

Enough Potentially Bullish News to Spook the Weaker Shorts

However, in order to generate a strong upside bias, there is going to have to be more progress than just talk. Therefore, we don’t expect to see any real buying yet. Besides, due to the lingering uncertainties, I don’t think the real gold buyers are going to be willing to chase this market higher when they could have been aggressive buyers earlier in the week at a major 50% to 61.8% zone at $1780.50 to $1705.20.

Additionally, buyers still face obstacles overhead that should provide resistance. We wouldn’t be surprised if the short-covering rally continued to press the market into a short-term retracement zone at $1870.30 to $1894.60. We expect short-sellers to re-emerge on a test of this area.

Daily Forecast

We stand by our forecast from earlier in the week that gold is an attractive buy at $1780.50 to $1705.20. This zone presents 50% to 61.8% of its entire rally from April to August. Essentially, if you couldn’t buy in April and you didn’t want to chase it in August then why not take a shot at it when it’s trading at the mid-point of the range? And that’s what we probably saw on Monday when the market reached its low of the week at $1767.20.

We feel that there is enough central bank stimulus (and more to come) to support the market over the long-run, and new fiscal stimulus to drive prices higher over the short-run. We just don’t think that the current rally is the one to chase.

Following any prolonged sell-off, the first rally is usually triggered by short-covering. This is usually followed by a short-term retracement or retest of the major low. That’s the break you want to look at for a possible buy. By then, we’re likely to see more positive developments toward fiscal stimulus.

Furthermore, Biden is expected to introduce an even bigger stimulus package as we move toward the administration shift on January 20. Biden is also expected to be dovish for the dollar which should provide further support for gold.