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James Hyerczyk
Comex Gold
Comex Gold

Gold prices are up slightly after a strong surge in Wednesday was fueled by short-covering and position-squaring amid hopes for a new round of U.S.-China trade talks. However, the early price action suggests the move was just a reaction to the surprise news and not a trend-changing event.

Furthermore, in announcing the news that the U.S. had invited China back to the negotiation table, there was no formal announcement of acceptance by China, or a date for the expected meeting. Nonetheless, the news was enough to shake out a few of the weaker short-sellers.

At 0924 GMT, December Comex Gold is trading $1211.40, up $0.50 or +0.04%.

In placing all the blame for the short-covering rally on the U.S.-China announcement, traders failed to acknowledge the dip in U.S. Treasury yields due to weak U.S. Producer Price data. The weaker yields helped make the dollar a less-desirable investment, and this may have been the catalyst underpinning the market initially.

In the U.S. on Wednesday, the Labor Department reported U.S. producer prices unexpectedly fell in August with the weakness led by declines in the prices of food and a range of trade services. The decline could have been worse if not for an increase in the cost of energy products.

Additionally, the Federal Reserve’s latest Beige Book released late Wednesday showed three of the Fed’s 12 districts – St. Louis, Philadelphia and Kansas City – reported weaker growth in August. Fed Governor Lael Brainard

Finally, Fed Governor Lael Brainard said in a speech on Wednesday that the Federal Reserve likely will continue gradual interest rate increases but will accelerate the pace if signs that financial imbalances continue to build.

Forecast

Gold looks enticing because of the higher-top, higher-bottom chart pattern, but we don’t know for sure if real buying is driving the price action or short-covering. We may not know until Friday when the Commodity Futures Trading Commission releases its latest Commitment of Traders report. Obviously, the bulls would like to see a reduction in the current net short position built by the hedge funds and money managers.

I don’t want to downplay the importance of the possible trade meeting between the U.S. and China, but the fact is, we don’t even know who is going to be at the meeting – low-level or high-level negotiators for example. According to reports, it’s just an invitation to resume talks. So far there is nothing formal in the works. Therefore, I think it’s more critical to pay attention to the directions of U.S. Treasury yields especially ahead of the widely expected Fed rate hike later in the month.

The December Comex Gold chart pattern suggests a strong upside bias is developing, but there is going to have to be a major catalyst to drive the market to the strong side of the retracement level at $1215.10, and more importantly through the main top at $1220.70.

Short-covering alone will not lead to a sustainable rally. Gold needs some real buying, or prices could collapse back through $1205.90 and into the next major support zone at $1193.90 to $1187.60.

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