Gold Closes Sharply Lower Following Friday’s False Breakout

After trading to a high of $1520.90 on Friday and closing just a few dollars above $1500, gold futures opened just above the resistance trendline created from the series of lower highs, and closed solidly lower breaking below $1500. Gold futures basis the most active December contract lost $10.50 in trading (-0.70%), and closed at $1494.80.

It is common knowledge that the focus from a fundamental standpoint in gold prices will shift to the upcoming FOMC meeting which will occur later this week where a 25-basis point interest rate cut is the highly anticipated outcome. The question becomes whether or not a ¼% rate cut is already factored into current pricing.

Currently the CME’s fed watch tool predicts that there is a 95.1% probability, that the Federal Reserve will announce and initiate a ¼% rate cut taking the Fed fund rates from 1.75% – 2%, to 1.50% – 1.75%. This tool also predicts that the probability that interest rates will remain unchanged is only 4.9%.

That being said because the FedWatch tool predicted a 93% probability of a rate cut on Friday, it is likely that this potential cut is largely factored into current pricing. What is unique to current pricing is the relationship between gold as a safe haven asset and the inverse correlation to U.S. equities markets. Typically, money moves back and forth between these two asset groups creating an inverse or negative correlation.

However, the exception to that rule is during times of monetary easing when central banks are lowering interest rates or doing some sort of monetary stimulus which tends to have a bullish influence on both asset classes. Today’s lower pricing in gold which is a partial reflection of the bullish demeanor in the risk on asset class suggests that typical inverse correlation between stocks and gold prices is currently favoring equities.

On a technical basis gold closed just above the .23% Fibonacci retracement created from the most recent rally which took gold from $1270 to this year’s current high of $1564 per ounce. This indicates today’s close created only minor technical damage as it broke and closed below $1500 per ounce. If pricing however is unable to sustain that price level, the next major support level on a technical basis does not occur till $1450 per ounce which is the .38% Fibonacci retracement.

When you consider the effect of a rate cut by the Federal Reserve this week, and that it should have a bullish influence on gold and stocks, if there are any major developments to the trade war negations, or the recent change in sanctions by the U.S. regarding Iranian oil export it could easily change the dynamics between the asset classes.

Wishing you as always, good trading,