Is Gold Really Recovering or will it Correct Lower this Week?

Key Points:

• Downside risks are increasing despite last week’s excellent performance.

• Technical bias remains mixed.

• Interest rate speculation likely to see increased selling pressure this week.

Gold reversed its fortunes somewhat last week, moving higher and ending what has been its worst tranche of losses in a while. As a result, it may be worth taking a closer look at what was driving this price action and what it could mean moving forward. In particular, we should take a look at the fundamental and technical factors that have been impacting,and will continue to impact, the metal this week.

Starting with the week that was, last week saw gold have some of its best performance in some time despite a notable slide on Thursday following the uptick in the US Philadelphia Federal Manufacturing Index. Most of the gains came as a result of the market taking a risk-off approach on Wednesday as allegations swirled that Trump had interfered with the FBI investigation into his ties to Russia. The session saw US stocks go into free fall and the VIX spike from 10.61 to 15.59 – both developments encouraging traders to retreat to safe havens. The ultimate effect of the fresh bout of geopolitical risk meant that gold closed the week substantially higher at around the 1255.27 handle.

From a technical perspective, the big development has been gold surging above its 100 day EMA and the convergence of the 12 and 20 day averages. Taken together, this would suggest that gold is potentially entering a new uptrend. Interestingly, this would be in agreement with the Parabolic SAR reading which has been indicating that this has been the case for some time. Moreover, it would tend to indicate that the uptick in buying pressure last week is more than a knee-jerk reaction. However, contrary to this, we have also seen stochastics trend almost into overbought and the existence of a historical reversal point near the metal’s current price could limit gains without some strong fundamental support.

Speaking of fundamentals, we are tentatively expecting to see this week’s data put pressure on gold. More precisely, the bevy of speaking engagements from FOMC members and the release of the FOMC Meeting Minutes will be watched closely by those seeking to gauge the probability of us seeing a rate hike in the coming meeting. Currently, the probability of a hike is around 76% and any increase in this following the scheduled remarks or the minutes release will put pressure on gold prices, leading to a near-term reversal for the metal.

Ultimately, given the mixed nature of both the technicals and fundamentals, it’s fairly hard to form a bias moving forward. However, on the balance of things, the evidence seems to suggest that downside risks may be on the rise due to the increasing chances of a US rate hike and the presence of that technical reversal zone. As a result, we have a fairly bearish view for the week to come but keep an eye on Trump as he has a propensity to impact the market erratically.