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James Hyerczyk
Comex Gold

Gold futures closed lower last week after a rally into a multi-year high early in the week failed to attract enough new buyers to continue the move. We’ve been saying for weeks that despite it hovering near its high for the year, the buying has been weak since the market hit a high on August 13 at $1546.10.

Although the market hit spike highs at $1565.00 on August 26 and $1566.20 on September 4, the gain from high-to-high had not been very impressive. This was an indication that investors were unwilling to buy strength or chase the market higher at current price levels. Consequently, support collapsed last week and the market fell to its lowest level since August 23.

Last week, December Comex gold settled at 1515.50, down $13.90 or -0.91%.

Gold has been trading mostly sideways since it hit $1546.10 on August 13. This, despite an inverted yield curve and an escalation of tensions between the United States and China. The inability to rally out of the month long $77.30 trading range on the back of bullish fundamentals, tells me that sentiment has shifted and investors are no longer looking to chase the market higher, but would rather buy value.

Why did sentiment shift? I think investor sentiment changed because the major central banks in Australia and New Zealand stopped cutting rates and have chosen to take a “wait and see” approach. Furthermore, they have telegraphed their next rate cuts, so there are no longer any surprises.

Additionally, the 25-basis point rate cut by the Fed in September has been priced in and the market has also priced in an aggressive move by the European Central Bank (ECB) later this week. So in my opinion, gold is fairly priced, or may even be overpriced, which means it has to come down into a support area to re-establish value for traders.

Weekly Forecast

A couple of weeks ago, I said that gold has more downside potential than upside potential. I still feel that way with $1489.10 to $1471.00 my next downside target. Investors may try to establish support inside this area this week, but if it fails then look for the selling to possibly extend into $1481.30 to $1461.30.

Remember, if the ECB surprises with an extremely aggressive stimulus package then the Euro will tumble. This would drive up the U.S. Dollar Index. A stronger dollar will mean lower demand for gold.

Furthermore, more stimulus could be bullish for risky assets. Higher stocks could put pressure on gold’s appeal as a safe-haven asset. This would be another factor weighing on gold prices.

The only way I can see gold moving substantially higher this week is if the U.S. and China call off the trade talks.

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