Gold futures posted a sizable rally Friday, but still finished last week lower making it the eighth week out of nine that gold has posted losses. Gold’s rally on Friday of over $15.00 was most likely due to short covering and profit taking. Stock prices suffered losses and were under pressure following Janet Yellen’s post FOMC commentary late Wednesday which followed the first interest rate hike in almost a decade. The Fed Chair’s testimony was seen as more hawkish as anticipated as this month’s rate hike could beget as many as four rate hikes next year according to analysts. While I think that four interest rate hikes next year is ridiculous, I would say that at least one or two hikes would be at this point probable with the first one next year in June. As we get through the holiday season, I would like to see the Fed’s expectations of where inflation stands. Simply put we have been stagnating in a deflationary environment where for the most part the biggest winner was the equity sector. That could be changing in 2016. A withdrawal in global equities could provide a floor in gold prices heading into 2016. I’m not saying that we are surging back to 2011 highs, but a potential withdrawal in equities could surge Gold back up to the 50 day moving average at 1106.0 or up to the 100 day at 1114.9. The 200 day sits up at 1147.8. Should we take that out in the weeks to come, the market could channel up to 1200. Conversely, should the stock market rally in to end of year and the first two weeks of January, near term downside targets for gold will be the near term low at 1045, and if taken out, we could quickly move to 1020, which is the 2015 second support level. If we achieve that objective then most technicians will be potentially targeting a $1000.00 an ounce
I would say near term that gold traders should watch the action in the stock market and the dollar going forward. Holders of the world’s largest gold backed ETF (N:GLD) fell another 4.5 tons on last Thursday to the lowest level since September 2008. That brings its monthly outflow to 25 tons. Gold for 2015, for those keeping score, is down eleven percent for the year. As we come into month, quarter, and year end, I wouldn’t be surprised to see more short covering as we head into year end. A trade worth watching in my view utilizes February options. I propose buying the February 1020 put and selling 2 February 980 puts while buying the February 1110 call and selling 2 February 1150 calls for a purchase price of 3.00, or in cash value $300.00 plus all commissions and fees. The risks on the trade are the price paid for the options spreads plus all commissions and fees. I feel that the underlying February futures contracts will achieve one of these scenarios by late January.