Fundamental Forecast for Gold:Bearish
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Gold prices were virtually unchanged on the week with the previous metal down just 0.05% to trade at 1256 ahead of the New York close on Friday. The recent range-bound price actions comes amid broader volatility in U.S. Equity markets with all three major indices set to close lower on the week. Although the sell-off in gold may have taken a short reprieve, technically the broader risk remains for a move lower on account of the technical damage suffered earlier this month.
Remarks made by Federal Reserve Chair Janet Yellen on Friday highlighted the central bank’s dilemma in pin-pointing the appropriate timing for policy tightening amid a weak and protracted economic recovery. Of particular note were her comments on the risk of maintaining accommodation for too long and the difficulty facing the committee as they struggle to “quantify the costs/benefits of such a strategy.” For gold, the focus remains on the path of future rate hikes with Fed Fund Futures continuing to price in a 70% chance for a 2016 rate hike.
Heading into next week, traders will be closely eyeing the release of the September Consumer Price Index (CPI) after minutes from the latest FOMC policy meeting cited that “survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.” Should the data show a stronger-than-expected increase in the pace of price growth, look for gold prices to remain under pressure. Aside from the economic docket, a fresh batch of central bank rhetoric from 2016 voting members Fed Vice-Chair Stanley Fischer, New York Fed President William Dudley and Fed Governor Jerome Powell may also impact prices as expectations for a December rate-hike continue to prop-up the U.S. dollar, to the detriment of gold.
A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net long Gold- the ratio stands at +2.78 (74% of traders are long)- bearish reading. Long positions are 1.4% above levels seen last week while short positions are 2.0% lower over the same time period. Open interest has also continued to soften (2.5% below its monthly average) and suggests that while the broader focus remains lower, the immediate decline may be nearing exhaustion.
The technical outlook remains unchanged from last week as prices “close the week above near-term support at 1249 - a region is defined by the the 38.2% retracement of the advance off the December low and the median-line extending off the My high. A break below this level targets the highlighted median-line confluence (~1220) backed by key support at 1204/10.
Initial resistance is eyed at former median-line support ~1290 with our bearish invalidation level now back at 1303. From a trading standpoint, I would be looking for a rebound early next week to fade into more meaningful structural support where prices could mount a more aggressive counter-offensive. “
---Written by Michael Boutros, Currency Strategist with DailyFX
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