While the dollar managed to recoup the majority of its intraday losses and was essentially unchanged at mid-afternoon in U.S. trading today, gold prices managed to hold onto the majority of the intraday gains. The contract for December settlement ended the day in the upper portion of the day’s trading range, closing at $1,262.9 an ounce, up 0.5% over Monday’s close.
Today’s gain occurred following a mixed September CPI report. The all-items index was up 0.3%, in line with expectations, while CPI excluding food and energy was up 0.1%, just short of the consensus estimate of 0.2%. The all items index is up 1.5% year-over-year, in line with the Fed’s long term inflation target of 2% and is the largest 12-month increase since October 2014.
Overall, the data supports an interest rate increase before the end of the year. Fed fund futures are still indicating a 69% chance of a rate increase at the December meeting. A rate hike would support the dollar and likely put pressure on gold. Thus, the sustainability of any recovery rally that may develop over the near term appears highly questionable.
Today’s advance moved gold prices within the zone that defines first resistance, $1,259-$1,267.6, representing the June 24th low and the high of October 7th’s wide price swing. On a break above the upper boundary of this zone, the next level of chart-based resistance does not come into play until the $1,306-$1,309 level. However, should gold prices stage a recovery, Fibonacci retracements of the decline from the September 22nd high through the October 7th low will be identified as potential resistance levels.
The recent range-bound trading in gold prices is serving to ease the deeply oversold condition that developed as a result of the late-September/early October slide, which pushed prices down nearly 7%. However, the Stochastic, a price momentum indicator, remains relatively depressed. Therefore, follow through on today’s move higher is possible in tomorrow’s session.
However, given the recent breakdown in gold, new buying appears to carry a high degree of risk. At present, the target for gold prices is at the next level of key support in the vicinity of the $1,200 level, which was tested with the lows established in February and late May of this year. A decline to this target would surpass the 50% retracement level of the advance from the November 2015 low, which stands at the $1,218 level. The contract is currently testing the 38.2% Fibonacci retracement of that advance.
With September CPI now in the books, the next key events this week for gold include the outcome of the European Central Bank meeting on Thursday and China’s GDP release, which is due late Tuesday evening easter time. In the U.S., Housing Starts/Building Permits will be released Wednesday at 8:30am ET, while Existing Home Sales are due out Thursday at 8:30am ET. This week’s schedule is also heavy with speaking engagements by Federal Reserve officials. Fed Vice Chair Stanley Fischer spoke Monday and reiterated concerns that low interest rates may leave the U.S. economy vulnerable to shocks. On Wednesday, the Fed will release its latest beige book, a review of regional economic conditions.