Gold at 5-month low, does the opposite to what many expected

Nov 17, 9:57 am
Gold

Donald Trump is the president-elect and gold prices are down. This would have been dismissed as fiction just over a week ago where the markets geared up to see a Clinton victory, while poised to shift to a risk-off mode if Trump won.

Gold prices indeed react to the news of a Trump victory, rising by as much as $61, to post a two-month high on November 9th, but only to give up its gains later in the day. By Thursday, November 10th, gold prices settled into an unusual decline, falling by another $18 as the bearish momentum eventually sent gold prices to a 5-month low of $1211.42 on Monday, November 14th.

However, despite the rather surprising move in gold and equities which eventually led to broad market strength, the markets are still in a phase of adjusting to the news of a new US administration led by Donald J. Trump. In this context, gold prices could remain vulnerable in the near term while the Dow Jones Industrials hovers near all-time highs.

Economic data from the US has been strong and supports the main narrative of an interest rate hike by the Fed come December.

Interestingly, the markets questioned the rate hike by the Fed following the Trump election victory, but soon after, comments from various Fed officials and the selling in the bond market started to push rate hike speculation higher, which typically results in weaker gold prices.

After plunging to the 5-month low on Monday, gold prices have been trading flat for the past two days. But that could change with today’s testimony of Janet Yellen. In all likelihood, Ms. Yellen could simply toe the line keeping rate hike prospects alive, but not giving away too much.

Eric Rosengren, the Boston Fed President, said “Absent significant negative economic news over the next month, the market’s assessment of the likelihood of tightening in December seems plausible.” His comments echo other members of the FOMC include Bullard who reiterated that he expects to see one rate hike increase and that the surprise election result did not lead him or his colleagues to make changes to the near-term economic outlook.

The exception to the Fed comments was, of course, Daniel Tarullo, considered to be dovish in his views. Tarullo declined to give any strong views on rate hikes. He said that policy makers would “continue to watch what happens and react appropriately” based on the incoming data.

Gold weekly outlook – A doji close this week would be nice

With still two trading days to go, gold prices haven’t budged much, and a doji close on the weekly session would be a welcome as a bullish follow through from there on could signal a near-term retracement to the declines.

As long as the current weekly lows are not breached, gold prices could be looking to push higher in the near term, with initial resistance seen at 1250. It is quite likely that gold prices could stay range bound within the 1250 – 1200 price zone. Also of importance is the head and shoulders pattern that has formed with 1250 serving as the neckline support.

XAUUSD – Daily Chart, head and shoulders pattern
XAUUSD – Daily Chart, head and shoulders pattern

While the neckline has been breached, gold prices could be in for a minor retracement back to 1250, followed by 1300, if the current lows hold. In the medium term, the downside bias in gold could increase, pushing prices to the head and shoulders target level of 1173.50. So far, price action has breached the 127.2% of the head and shoulders pattern and could see a reversal here.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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