BullMarketRun.com

The wind was at Gold’s back again today as fresh U.S. economic data – a sharp decline in producer prices as well as weaker than expected retail sales – allowed bullion to soar to a 3-and-a-half month high, bringing it within shouting distance of the psychologically important $1,200 level.

While Gold faces a strong near-term resistance band between about $1,190 and $1,210 (see John’s chart below), and will go through some consolidation to unwind any temporarily overbought conditions, the yellow metal clearly has a couple of important factors in its favor as 2016 rapidly approaches:

1) The Federal Reserve is losing credibility.  Rather than actually acting to raise rates when it likely had a window to do so last year, the Fed has “talked the talk” but has been unable to “walk the walk”.   Astute traders are now betting on no rate hike until at least the spring of next year given deflationary pressures and a slowing economy (U.S. Q3 growth may have been as little as 1% according to some estimates).  That pulls the floor out from underneath the U.S. dollar which went on a record run between the summer of last year and the spring of this year based on Janet Yellen’s persistent rhetoric regarding a near-term rate hike and inflation gradually making its way back to the Fed’s 2% target level.  Any rallies in the greenback are just that – rallies within a continuing downtrend that started last spring.

2) Geopolitics.  The great irony about Barack Obama is that this President actually won the Nobel Peace Prize (for what?) shortly after taking office in 2009, yet his consistent failures in foreign policy – from the Middle East to mishandling Vladimir Putin and an expansionist Russia – have helped make the world more dangerous than ever.  Putin and others are taking full advantage of Obama’s weakness on the international stage, and American’s declining influence, and this will only intensify during his final full year in office.  Few analysts are taking this into account, but we expect a risk premium to build into Gold during 2016 as “hotspots” flare up around the globe, Russia becomes even more aggressive, and terrorism unfortunately escalates.  The next President will inherit international chaos, worse than the problems Ronald Reagan had to fix after Jimmy Carter.

Gold 6-Month Daily Chart

Gold has confirmed a breakout above $1,160 which is now new support, as was demonstrated today.  Buy pressure has increased rapidly this month (bullion is up 5% already in October).  The rising 50-day moving average (SMA) is now $1,130, while the ADX indicator has changed remarkably since mid-July.  Gold’s biggest technical hurdle, as confirmed by John’s 2.5-year weekly chart, is to break out decisively above a downsloping flag which currently intersects around $1,225.

Taking all of the above into account, any surprises in Gold over the next several months are likely to be to the upside in our view.  All the more reason to be holding high-quality Gold producers and juniors.