Gold is consolidating at the bottom of a long and steep downtrend, which came on the belief that the Fed will raise interest rates. Does the consolidation signal a bottom, and how much impact does the Fed have?
Gold has fallen heavily out of favour with the markets recently and the ensuing bearish trend has seen it hammered from a high of $1,191.44 to as low as 1,065.36 in a little over a month. The US Federal Reserve is largely to blame thanks to their renewed hawkish rhetoric that has the market putting a rate rise in December at over 70%.
The Fed has reiterated that any rate rises will occur at a ‘gradual’ pace which could mean anything. Essentially it is the Fed trying to shape market expectations so a series of rate rises one after the other are not priced in. The Fed wants time to see if a single rate rise has a negative effect on the markets and the economy before pressing ahead with any other.
The first rate rise in December is largely priced in, although we can probably expect a knee jerk reaction from the 30% who did not believe a rate rise was coming. The statement will be crucial and will determine whether gold rises or falls. I suspect it will ultimately rise, given how heavy the selling has been recently and the Fed will likely reiterate the gradual pace or rate rises, so we may not see the next one until mid-2016.
If we do not see a rate rise in December, you can be sure the gold bulls will rejoice. The recent extraordinary Fed meeting to discuss discount rates saw 9 out of 12 Federal banks vote to raise it, which would have been a perfect precursor to a December interest rate rise. However, Fed Chair Janet Yellen overruled and voted against raising it. This now raises questions about the December meeting and if we will see a rate hike at all.
Where does that leave gold now? The consolidation is likely to lead to an upside breakout because the market is not going to go any higher than 70% chance of a hike. That opens the door for some profit taking, short covering and hedging. In the absence of any strongly hawkish signals from the Fed before the meeting, a pullback is the likely scenario. Any upside break is likely to find resistance at 1079.61, 1096.10 and 1117.59.
In the unlikely scenario that the rhetoric gets more hawkish from the Fed and gold breaks to the downside, look for support at 1065.68, 1044.35 and 1025.14. The slight back-pedalling by the Fed (i.e. not raising the discount rate) makes this scenario highly unlikely.
So to answer the question if gold has found a bottom, I would say yes, for now. After the meeting is anyone’s guess. Watch for volatility that could take out any set levels of support and resistance and lay waste to even the best analysis. Give the market time to react and digest the decision before taking any positions.