Gold's outlook remains bleak

Gold has been moving sideways throughout much of December, but at the current price level of around $1070 per ounce it essentially holds near the multi-year lows it hit earlier this month. This is hardly a bullish indication; if anything, the lack of a more significant bounce here is quite bearish. Gold’s hesitation to go further lower has coincided with the dollar heading generally lower this month. That’s despite the fact the Federal Reserve has finally lifted US interest rates for the first time since 2006. But it remains to be seen whether the US currency will be able to resume its upward trajectory now that the FX traders are slowly returning post-Christmas. Given the fact that most other central banks are still dovish, this could well be the case. Indeed, the EUR/USD currency pair has struggled once again today to move above the 38.2% Fibonacci level from the August drop at 1.0980; it would be very bearish if the sellers were to re-emerge at this shallow retracement level. Against this backdrop and the resurgent equity markets, combined with the relatively low demand for safe havens, gold’s short-term outlook continues to remain bleak.

Indeed, I still think the yellow metal will at least drop to the psychologically-important $1000 mark at some point in early 2016, before staging a more noticeable recovery. At this stage, only a decisive break above resistance at $1080, or ideally $1098/1100, is required to end the near-term bearish bias. Even so, gold would still remain inside the long-term converging trends and below the 200-day average. Until such a time that gold breaks decisively out of this channel to the upside, traders in general may treat any short term bounces as selling rather than buying opportunities like they have since the metal peaked in 2011.

The key risks to my bearish outlook are the fatigued stock markets and the dollar. If the twain fail to move higher and risk aversion increases then gold’s appeal as a safe haven asset will most likely rise. But if the market strongly believes that the Fed will continue to raise rates as set out in the FOMC’s latest Economic Projections, then the dollar may continue to push a lot higher since most other major central banks are still very dovish. Added to this, inflation is still non-existent for most major economies, so there is less need for gold as a hedge against inflation.

For the time being though, gold has found some support around the lower trend of its long-term triangle pattern and the 127.2% Fibonacci extension level at $1046. The daily RSI is also in a state of positive divergence with price, suggesting that the bearish momentum is weakening. Still, for the reasons stated above, gold could easily break down and potentially drop towards the 161.8% extension level at $1006/7, before possibly going for the psychologically-important $1000 handle next.