By Kira Brecht
Sunday November 20, 2016 19:05
(Kitco News) - The gold market has taken it on the chin since the election of Donald Trump to the White House. Financial markets are pricing in expectations of future Fed interest rate hikes and also a big economic stimulus package that could boost inflation.
U.S. Treasury yields have soared dramatically higher –as the bond market prices in expectations of future inflation. The yield on the 10-year Treasury note has skyrocketed from 1.77% to the 2.35% level since November 4.
WHAT'S DEPRESSING GOLD RIGHT NOW?
Inflation is generally a bullish factor for the gold market, as the yellow metal is a traditional inflation hedge. While the Federal Reserve may not have a whole lot of tools to battle deflation –the central bank does know how to fight inflation.
The Federal Reserve has a proven track record in battling back against rising prices with higher interest rates –and that may well be why the gold market is in a depressed mood right now. Higher interest rates compete with gold, which is a non-interest bearing asset.
How much lower could gold slip in the near-term?
Technically, gold is ripe for an oversold bounce. The 14-day relative strength index (RSI) shows that momentum has declined below the 30% oversold line to 27% on Friday. The most recent RSI decline under 30% was seen in early October (marked at Point A) on Figure 1 –and that preceded a sharp rally in gold to the $1,338 per ounce level (marked at Point B).
Gold may have found a floor. The December Comex gold futures contract is testing support at the $1,207 per ounce level, the May low. Friday's selling tugged gold just below that zone to create a new support zone at $1,207-$1,201.30.
Gold has fallen over a $175 from its July peak and bargain hunting long-term investors will begin to sniff around for a good entry price.
Even if the Fed does quickly snuff out any inflationary pressures that could emerge in 2017, there are a bevy of other factors that will keep a floor under the gold market and keep buyers entering on price dips. Here are just a few:
- Uncertainty over the potential for a trade war.
- Rising geo-political tensions.
- Portfolio diversification: A hedge against stock market declines.
Bottom line: The gold market bulls is down, but not out. The market is ripe for a technical rally and gold prices around $1,200 an ounce may not last long.