In the past few weeks we have seen the price of gold dip back down towards support. Last year there was a huge rally in gold, silver, and mining stocks after the covid market meltdown that peaked out at the end of August. Since then the metals and mining market has really been going through a sideways consolidation phase. Even the dip of this month is dip down towards support in that long drawn out sideways pattern, now on its fifteenth month.
There is speculation that manipulators are causing the metals to be weak or that money is moving out of the metals and into Bitcoin. The latter certainly isn’t the case as the crypto market topped out months ago and also has been falling this month.
What is really happening is that traders and markets are forward looking. Traders tend to buy ahead of news and then sell when it comes to fruition. The news impacting gold is the coming Federal Reserve reduction in its QE bond buying operations. This is expected to be announced at either at its November or its December meeting. The Fed has had a history of liking to make more hawkish moves in December, when few people are looking to sell stocks with only a few more weeks left in the year.
The reason this is impacting gold is that the US dollar is rallying into this QE reduction event and gold is most heavily impacted by moves in the US dollar than anything else.
Here is a chart of the US dollar index. As you can see it broke out this week of a consolidation pattern of its own.
We’re likely to see the US dollar rally continue into one of the next two Federal Reserve meetings. That doesn’t mean gold is going to straight down for weeks. We saw some signs of positive action with mining stocks on Tuesday, but gold isn’t likely to put on a big rally until December or New Years.
Here is a chart of gold so we can see where support now is.
Gold now has support in the $1650 – $1693 area. In August, gold briefly fell to $1680. This price zone isn’t much further away from gold’s Wednesday closing price.
To me this is more of a time factor than a price factor. I’m not expecting some giant drop in gold from here, but it is likely to take into December before we see the next sustainable gold rally. Look for an up and down basing pattern to form above the support zone.
Once the next rally it comes it could be a big one as it will happen out of such a long consolidation phase. A coming reduction in QE is also starting to take some of the air out of the stock market and a stock market decline later this year or (more likely) in the first quarter of next year would cause the Fed to get more dovish, much like they did in December of 2018, which would cause gold to begin its next big cyclical rally.
Remember traders buy the rumor and sell the news. That means this US dollar rally is likely to end once the Fed begins its QE reduction program. The upside is likely in the 88-101 area of the US dollar index. Again this is not huge upside from here and it’s more a rally of time than price when it comes to the standpoint of the last day of September.
-Mike
