Can Gold Hold $1,200 As A Support Level?

The question on many gold traders and investors minds is whether gold will be able to maintain its current price point above $1,200 per ounce. From the last week of August to the last week of September, gold prices were able to sustain a value at or slightly above $1,200. On September 27, gold broke below that key psychological support level before recovering on October 2 when gold futures opened at $1,192 and closed at $1,203.

October 2 also marked the first time since April 23 when gold prices actually traded above its 50-day moving average. Although gold has now traded above its 50-day moving average for the last three consecutive days, gold prices have failed to close above it.

Dollar strength, higher interest rates, and a rising U.S. equities markets have applied tremendous pressure, limiting any strong upside move in gold pricing since mid-April when gold reached its highest value this year at $1,370. In mid-August, gold prices hit the lowest value this year when it traded to a low of $1,164. That is a price decline of $206, which represents a net decline of approximately 17%.  

Current gold pricing can certainly be viewed as oversold and undervalued with many traders assuming that gold is currently forming a base at this price level. However, for gold to gain any real traction or upside momentum, the fundamentals which have been driving gold prices lower must subside or reverse.

Higher interest rates have driven the U.S. dollar higher which has had a reciprocal and opposite effect on gold prices. The Federal Reserve has raised rates a total of three times this year, which is a brisk pace when compared to the previous five rate hikes which began in 2015.

The Fed could raise rates in December, which would mean that 2018 contained almost as many interest rate hikes as were initiated from 2015 to the end of 2017. Currently, the CME’s Fed watch tool predicts that there is an 85.2% probability that the Fed will raise rates four times this year, with one more hike still to come before the end of the year.

Federal Reserve Chairman Jerome Powell spoke to PBS News Hours Judy Woodruff yesterday and said, “The U.S. economy is experiencing a remarkably positive set of economic circumstances. There’s no reason to think this cycle can’t continue for quite some time, effectively indefinitely.” Higher interest rates would support dollar strength and both dollar strength, and higher interest rates would put considerable downside pressure on gold pricing.

Lastly, the strong risk-on market sentiment created from the current bull market run in U.S. equities is placing additional pressure on gold prices. Collectively, these forces have been at the core of the current pressure which has taken gold prices lower. Without a dramatic change in one or all of these factors, gold is destined to trade sideways or lower.

Wishing you as always, good trading,