Looks like these days the "gold question" is a widespread issue that worries the whole market. Is it time to open longs now, and what will happen to gold next?. Will the market present better lower prices, or the current levels are already interesting ones. The geopolitical situation continues to remain unpredictable, and the current equities growth will sooner or later end, and be replaced by fixation of profits and decline. Therefore, gold is the market everyone is looking at, and almost all traders and investors are interested in.
Gold found support in the area of $1260, showing two positive sessions in early October and managed to gain higher, the market began to talk that the long-awaited reversal finally took place and the market found the bottom. Then the market moved up through very important historical area: $1290-$1295 levels, and the bullish mood only intensified. However, this week the US dollar again moved to the strengthening, the yellow metal failed to consolidate at the reached levels, fell under pressure and declined into the $1280- $1285 zone.
The correlation between gold and the US dollar is always interesting. It determines the dynamics of the gold market, historically setting the behavior of the gold market as dependent, since gold has an inverse correlation with the dollar. As the dollar gains, the value of gold on the market is growing, and demand is correspondingly falling, which ultimately leads to a decrease in the price. Conversely, the weakening of the US dollar makes gold more attractive for longs and leads to higher prices in the market.
The explanation is the following: non-dollar gold buyers can purchase more US dollars for each unit of their currency, allowing them to buy more gold at a lower price. As always, the real driving forces of the gold market, and any other market are fear and uncertainty, defined in the financial market as the concept of volatility.
The next major factor influencing gold has always been geopolitical and market uncertainty. Geopolitical uncertainty, such as tension between North Korea and the US or the escalation of terrorist threats, is a driver for demand for protective assets. If the factor of geopolitical uncertainty remains outside the analysis area, then we have some opportunities for analyzing the dollar market.
The nearest meeting of the Fed will be held on December 13, 2017, and most likely will result in an rate hike for federal funds by 25 basis points. If this happens, the markets will receive an additional impulse to buy US dollars, which should put pressure on gold. However, do not forget that the markets price in such events in advance. And most likely these expectations are already priced in current levels. A couple of weeks ago, when the expectations for the rate hike were somewhat lower than today (according to the CME), the dollar index was traded at 94 points. Today, the dollar index trades at levels 93.44, and the probability of a rate hike in December is estimated at 91.7% according to the CME Fed Watch tool. Thus, we can assume that the expectations of next rate hike are already in the price. In recent months, the growth of US dollar was the main factor of pressure on gold.
Will the growth of gold continue at the end of 2017 and beginning of 2018?
We think that gold positions are strong enough and it’s growth will continue. Even without taking geopolitical risks into account. The equity market continues to update historical highs, and gold has always been used as a counterweight to stocks. The fixation of profits on the stock market will lead to an higher demand for gold. Yellow metal is the ideal asset of a safe haven at the time of the decline in the stock market. The expected growth in US inflation is also a factor in favor of gold. From a technical point of view, the current situation is very interesting for opening mid-term longs. Level 1275-1280 is a strong support zone. We do not think that the market will show prices lower. When the market consolidates above 1285-1290, it will attract less risky investors and short-term players. However, it will already be other prices!
Good luck in trading!