Gold has continued to push higher and is now trading into a chart resistance zone.

You can see the area highlighted, which I have labeled as a “Congestion Zone”.

That range contained the price for large portion of the month of August. Gold then broke out of it to the upside late that same month and continued to run higher until it peaked in early September. After that, it fell all the way back into the same congestion zone before falling through that late last month and early this month.

It has since rebounded as Dollar weakness and interest rate weakness has returned of late.

I make no secret of my view that Gold is living on borrowed time. “Borrowed” because other than the support it will continue to receive from the N. Korea situation, the Fed is the only thing supporting it at the moment. By that I mean to say that any time doubt creeps in as to whether or not the Fed will hike rates this December, interest rates creep down here in the US and with them, so too does the US Dollar. That allows gold a respite, short covering occurs and it pops higher. However, I believe rallies are going to be sold considering the ramifications for further rate hikes on the US Dollar and for interest rates here in the US. Talk remains in the market that the Fed wants to hike rates 4 times next year. That, if it happens, will be significant and provide some serious headwinds for the yellow metal.

I do want to repeat something that I have written here before – I do not believe that gold in and of itself is an inflation hedge. Crude oil is actually better in serving that role. Gold is only an inflation hedge if REAL RATES are negative. Then it admirably protects against such things.

There is a line of thinking, quite erroneous in my view, that you buy gold if inflation is picking up. That is a half-truth which is simply not borne out by data. It comes back to the role of the Dollar. The stronger the US Dollar becomes, the more gold struggles to move higher. That is because a strengthening of the Dollar is generally one of the side effects of higher US interest rates. Since gold throws off no yield and is entirely dependent on capital appreciation, it has to compete against Treasuries for investor money flows. Higher yields on risk free US Treasuries, entice investment flows as long as investors believe that real yields are positive.

The wild card for gold prices is of course, N. Korea. Any further increase in tensions there and gold will garner safe haven buying. I still wonder what is taking China so long to rein in their spoiled little child ruler of the hermit kingdom.

Now, to add further to the picture – we know that the Fed wants to go ahead with additional rate hikes next year. At this stage, the ECB is still not talking any rate hikes nor is the Bank of Japan.

That is why this recent price recovery in the Euro looks more to me like a relief rally than the start of sustained bull trend in the Euro. If anything, the Euro has the look of a market sketching out a potential head and shoulders top formation. To validate that, it will need to fall below month’s low just above the EUR1.1700 level. Such a technical development, should it occur, should see the start of a sustained move lower in the common currency against the US Dollar.

For now, I am vigilant but am doing nothing in the Euro until I see something to convince me that the recent sideways price action is coming to an end.

Back to gold for a moment:

If it can push through $1302 we could see some further short covering. We are probably already getting some short selling against that level. We will get the US CPI numbers tomorrow so anything in that which might suggest inflation is heating up will pressure gold as it will fuel the speculation for a December rate hike becoming more likely. The opposite is true – if the reading is weak and it suggests inflation pressures are non-existent, that might be enough to dampen December rate hike expectations which in turn should weaken the US Dollar and in turn, boost gold.

We’ll see what we get in there tomorrow.

 

Comments (6)

Author’s gravatar

“Majority of the US government bonds gained in price today with the curve flattening, due to decent economic data emanating from the states as well as a solid demand for today’s 12-billion-dollar sale of the 30-year bonds at auction. We will see tomorrow with the CPI report another positive number could see yields dropping further.”

Hi Dan, Do you agree with these comments from Armstrong?

Thanks.

Author’s gravatar

Beegle – depends on what he means by “positive”. Armstrong is quite often murky in the adjectives he chooses to employ when writing.
Positive usually means upward, rising, welcome.
In terms of the CPI, consumers would normally welcome a lower CPI because it means prices remain low.
In terms of the Fed, positive means a higher CPI.

I personally would not use that adjective when the simpler and clearer choice of words should be a “weak” number or a “strong” number.

this morning’s number was weak and thus the yield curve has now flattened further. Since gold is completely at the mercy of the yield curve steepening out, it has now risen as the curve has flattened.
As long as the curve continues to flatten, the metal will keep grinding higher. If the curve reverses and begins steepening again, gold will fall in price.
If one is trading gold, they need to pay attention to the yield curve and by consequence, the US Dollar, since that is what moves that particular market, outside of geopolitical issues.

Author’s gravatar

Dan, what is the best gauge of “real” rates? 10 Year – 2 Year spread? and I guess there is misspell in ” it will need to fall below month’s low just above the EUR1.1170 level” It’s 1.17

Author’s gravatar

dyperhead – thanks for catching that typo… yes, it should be EUR1.1700 sorry about that amigo!
On the real rates.,,, I use the following website for all my interest rate calculations…
https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield
let me know if you have any questions with that…
Dan

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