Gold Should Brace for a Volatile Week

This week brings two expected volatility-inducing events for world markets:

  1. US midterm elections are scheduled for Tuesday. Polls indicate that Democrats are likely to regain control of the House of Representatives but not the Senate. However, let us remember that polls can often be wrong. Two years ago polls erroneously predicted that Donald Trump would lose the presidential election just days before the actual victory.
  2. The Federal Reserve meets for its once-per-six-week policy decision on Wednesday and Thursday, pushed back by one day due to the elections.

Any change in policy is due at the Fed announcement on Thursday at 2pm EST.

As can be seen below, the futures market is pricing in a 92.8% chance of no change to interest rates, so any policy change would be viewed as an unexpected shift by the market.

[chart courtesy CME: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html]

Beware Initial Reactions

Let us recall: a market’s initial reaction to a rogue political event is not always the correct one.

Two years ago this week on the night of Trump’s election, gold surged $65 within hours during a simultaneous 750-point drop in the Dow Jones Industrial Average futures. Markets were in a state of panic at the idea of a non-career politician taking over as Commander in Chief of the world’s superpower.

What was going to happen with Trump in office? Was this the end of America as we knew it?

The markets took a “sell-first, ask questions later” type of mentality on that November 2016 night. Was it the correct reaction?

The entire panic movement was reversed the very next day. Two months later, gold fell by $200 from the election night and the Dow was up 11%.

The point is: do not always trust the market’s initial fear-based reaction to any news event.

Gold Technical Update

Gold was slightly lower over the past week. Hence falling during the first part of the week only to recover during the second half. In sum, gold was down nearly $3 or 0.2% to close at $1,233 as of the final trade on the New York COMEX on Friday.

Gold now continues to face short-term resistance at $1240, matching a minor support level from the December 2017 bottom (black dashed line). What will lie ahead, assuming gold can break $1,240?

Gold’s primary resistance now comes in at $1,268 – $1,273, the 50% Fibonacci retracement of the entire April – August decline (light silver lines), and the broken 2015 – 2018 rising trend (blue), respectively.

Intermediate-Term Gold Expectations

Gold appears set to move higher into the US elections and Fed meeting, especially if the broad US stock market remains weak as it has over the past month.

Still, our expectation remains that gold will encounter significant resistance over the weeks ahead in the $1,268 – $1,273 zone, as described above.

Barring some unforeseen fundamental shift within the gold market, the charts argue that the metal should fail to break this resistance zone on the initial attempt.

We will thus look for gold to decline again to form a new low below the August bottom of $1,160, before setting up the next major opportunity for a more significant long-term low, which appears likely during the first half of 2019


CHRISTOPHER AARON

BULLION EXCHANGES MARKET ANALYST

Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency.

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.


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