The gold price fell through important support at $1,072, the 2015 low, during the past week. It dropped all the way to $1,062, marking the lowest price per ounce since early 2010. However, gold bounced back above the $1,072 support level and closed the week at $1,076. The RSI momentum indicator shows that gold had become oversold prior to the bounce and remains near oversold territory.
The recent price decline has been driven by increasing expectations that the Federal Reserve will finally raise interest rates at their December meeting. Recent comments by FED board members seemed to confirm this notion, although the rate hike is likely to be small in order not to shock the markets.
There is a “strong case” for raising interest rates when Federal Reserve policymakers meet next month, as long as U.S. economic data does not disappoint, a top Fed official said on Saturday.
“The data I think have been overall encouraging, especially on the labor market,” San Francisco Fed President John Williams told reporters after a conference at University of California Berkeley’s Clausen Center.
“Assuming that we continue to get good data on the economy, continue to get signs that we are moving closer to achieving our goals and gaining confidence getting back to 2-percent inflation… If that continues to happen there’s a strong case to be made in December to raise rates.”
The Fed is widely seen increasing its benchmark overnight interest rate at its Dec. 15-16 policy meeting, and the debate is already shifting to the pace of rate hikes going forward.
In my view, the recent drop below support at $1,072 significantly increases the chances that gold will test $1,000 in the near future. In the current deflationary environment with slowing economic growth, we can’t rule out such a move.
While mining stocks are severely oversold and undervalued relative to the metals, I think the best course of action is to wait and see if gold can hold up above $1,072 and then proceed to rally above the October high of $1,191. Only then can we increase our confidence that gold has bottomed and will continue to rally. In the meantime, caution is warranted.
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