Gold sell-off looks like it has further to go
Donald Trump as US President should have been good for gold with the prospect of trade wars and an inflationary boom in the US – which could still come to pass. But for now, rising USD and US interest rates have taken centre stage meaning that gold probably has further to fall over the next few months.
Gold looks poised to test support around $1,100-1,124 troy/oz as stock markets rally and interest rates look set to reach higher than expected levels next year, making it more expensive to fund gold positions.
The viciousness of the rout is not surprising as gold had become heavily over-owned by speculators who over the course of this year had ploughed $60bn into exchange traded funds (ETFs) alone. In the last few weeks they’ve pulled nearly $4bn out of ETFs.
However, true believers in gold are so far taking the sell-off in their stride. Once this group start throwing in the towel and / or short positions in the futures markets reach very high proportions and / or commentary becomes extremely bearish then that should signal that the yellow metal is close to bottoming out.
However, the world remains very turbulent and unpredictable. It is yet to be seen how closely Trump will stick to his election promises when he becomes President on Jan 20, 2017. If his administration stumbles into a trade war with China, that could see gold rally.
Another possibility of course is the break-up of the Eurozone, which might start next year. There are several key votes from Dec 4 through to the German elections in October 2017, which could usher in populist anti-EU parties.
And in the face of populism there’s not much the European Central Bank could do to hold the EUR together, it will be beyond its powers and will take some bold political manoeuvring to keep it together.
Nonetheless, bad news, the kind that ushers in chaos, is the best kind of news for gold – the ultimate doom insurance.
TECHNICAL ANALYSIS: Pause in gold sell-off looks close
The gold sell-off has been relentless and persistent over the last three weeks and this should have washed out many of the ‘weak hands’ in the market and the selling was likely exaggerated due to the sheer number of speculative long positions in gold. Once the selling pressure subsides, the bulls can get back in control.
By Friday last week there were signs that the pace of selling might be slowing with a cross pattern having developed on the chart on that day. Basically, it’s a sign that the bears were not able to keep pushing the market down suggesting that the bulls might be starting to get the upper hand, but not enough to significantly reverse the trend – in other words Friday ended as a stalemate.
It will be interesting to see if the bears can muster enough momentum to drive the market lower this week. If anything with the daily RSI now well into oversold territory at around 23, a consolidation or bounce-back is looking due.
If that pause is little more than a stop before the selling resumes – the market could fall all the way to $1,100. Support can be seen at $1,155 per troy/oz, $1,142 and 1,128 and resistance is at $1,208, 1,127 and $1,251.
By Justin Pugsley, Markets Analyst MahiFX