Gold Dips Below $1,300 Trend Line in Early October

Since hitting its post-Brexit highs in July, gold had been consolidating in a narrow $1,300 to $1,350 per ounce range. As we write in early October, the gold bull market has taken a pause. Markets are again pricing in a higher likelihood of a Federal Reserve (“Fed”) rate increase in December based on comments made by Fed members following its September meeting. This, in turn, is lending strength to the U.S. dollar.

Due to Economic Uncertainty, Gold Keeps Consolidating

Market Realist – Short-term correction consolidation

After the United Kingdom’s (EWU) vote to leave the European (VGK) (EZU) Union—the Brexit vote—investors shifted their focus to security over uncertainty. Gold (GLD) reached its highest level since March 2014 at $1,374.71 after the Brexit vote. However, gold (IAU) continued to rally only after a short-term correction consolidation.

In early October, gold rose modestly off the nonfarm payroll miss, perhaps on a lesser ebbing of rate hike expectations. Nonfarm payrolls for September came in at 156,000, below expectations of 174,000. However, these gold gains have proven unsustainable so far. Fed hawks have been out in force, keeping up the pressure.

Market Realist – Widening the risk

Gold prices continue to consolidate after the commodity printed a new low on October 7, 2016, at $1,241.27. This price suggests that October 7‘s low may be a value of support, and the high of $1,265.34 may act as a current value of resistance. This understanding may help investors plan for gold’s next daily breakout. In the event of a false breakout, investors may create an initial 1:2 risk-to-reward ratio.

With the US presidential elections in November, the likelihood of a Fed rate hike in December, and the strengthening US dollar (UUP), markets may see volatile (VXX)(XIV) movement in the near term. So investors are investing in gold to spread out risk rather than holding long-term government bonds (BND) (BSV) with negative yields.

In the next parts of this series, we’ll analyze historical prices as well as how India and Japan foresee gold prices in the near term.

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