Gold has nowhere to go but down

As gold marches back towards the $1,300 mark, a sustained trade above this level will be a tough punt. Gold certainly has performed well since July, and in mid-October rebounded from its September correction after testing support at the 200-day moving average, which so far has held. But in the end, with the odds of a Federal Open Markets Committee decision to raise the Federal Funds rate high—a better than 80% likelihood— the recent run to $1,300 will be tough to sustain (see “Gold support”).

Gold is facing some headwinds. With equity markets continuing to make new highs, reducing any urgency for gold, and with gold failing to respond to the plethora of geopolitical events, the air gets thin at $1,300 for the shiny yellow metal.

Gold tends to trade inversely to the U.S. Dollar Index, which has been in a sustained downturn since December 2016. However,   with the U.S. Fed looking to firm interest rates and trim its balance sheet, the fundamentals for the dollar look good. The dollar rebounded to 9400 from its September low below 9100 and that low may hold (see “Dollar turnaround”).

On the weekly charts, the dollar has spent the past three weeks consolidating above the 10-week moving average and recently tested the 20-week moving average before pulling back (see “Dollar weekly”).  As you can see, the 10-week moving average has flattened and the 20-week could be breached in the coming weeks.

Gold has had a good run in 2017, but with the Fed expected to tighten in December and soon begin a long unwind, expect another failed attempt for gold to break away to the upside from the $1,300 level.