Gold Exhibiting Modest Signs of Recovery

Last week gold reached a six-month low when prices on Tuesday drifted to $1238 per ounce, a price not seen since July of this year. This was followed by a $16 uptick the following day, immediately following the release of this month’s FOMC statement. Although there was not strong follow-through, both Thursday and Friday’s trading range resulted in a higher high and a higher low than the previous day.

Today gold futures traded moderately higher, and as of 2:30 PM Eastern standard time the most active February contract is up $6.50 at $1264 an ounce. This uptick in gold prices is currently stalled at the 0.618% retracement created from the $163 rally that preceded the most recent price correction. On a technical basis, gold must close above this price point and above the 200-day moving average ($1268.6) to confirm that last week’s rally was a beginning of a key reversal.

A close above the key levels mentioned above would effectively turn the current resistance level of $1264 per ounce from resistance to support. There have been a total of three occasions in which this price point acted as support, with two occurrences in October, and one incident of this price point in November. The last instance occurred immediately prior to gold prices breaking below $1264 and culminated when prices reached a six-month low at $1238.

Considering that U.S. equities have been on an unprecedented rally creating the strong risk-on market sentiment that is so prevalent today, and a strong U.S. dollar, this most recent upside move is respectable in that pricing has been curtailed by the current market sentiment.

Tax Reform Creates Both Bullish and Bearish Potential in Gold

Once completed, the current tax reform legislation could result in a combination of bullish as well as bearish price influences on gold. The proposed tax cut could very well increase the probability of inflation next year; this would create tailwinds and bullish sentiment taking gold to higher pricing. At the same time, this legislation could continue to fuel the U.S. equities rally, this would continue to fuel the risk-on environment so prevalent in market sentiment today.

Wishing you as always, good trading,