Gold ripe for potential relief rally

The charts tell a clear story of the unrelenting plunge in gold prices since early November. This steep dive has been the result of several related factors, all of which have the potential to extend well into the new year. These largely Trump-driven factors include: the strong US dollar, rising inflation expectations leading to higher interest rates, and minimal perceived risk in the soaring equity markets.

As a dollar-denominated asset, gold generally rises when the dollar falls. As a non-interest-bearing and non-dividend-paying asset, gold also generally rises when interest rates are low. And as a safe-haven asset, it is typically bought when there is fear in the markets and risk appetite falls, as investors flee to gold’s perceived safety. Since current conditions and expectations ahead of President-elect Donald Trump’s January inauguration have recently been the exact opposite of gold-supportive, investors have been rapidly dumping the precious metal.

Despite these current conditions, however, the brutal slide in gold prices for the past month and a half appears to have been considerably overdone, leaving the precious metal well-oversold and due for a relief rebound at the very least. Additionally, there will be many potential opportunities for the economic landscape to change as Trump’s still-uncertain policy implementation comes into clearer focus, the US inflation and interest rate trajectories become better understood, and global macro concerns continue to pose risk to the markets. Any significant changes in these or other factors could potentially lead to bargain-hunting investors flocking back to gold.

The Federal Reserve’s latest decision to raise interest rates by 25 basis points as well as to upgrade its 2017 outlook to three expected rate hikes from the previous two has also placed substantial pressure on gold. As noted, however, the higher outlook is largely a function of Trump-driven expectations going forward, and could change significantly as the new administration takes office. Furthermore, much of the effect of higher interest rate expectations has already been priced-in to plunging gold prices.

Finally, as we enter the final stretch of 2016, markets are perhaps just a bit too complacent, with volatility remaining exceptionally low as equities hover near record highs. The only risk that currently appears to be considered is the risk of missing out on the equity rally. Often when these conditions occur, it only takes some unexpected event or condition to trigger heightened market volatility once again, potentially sending investors fleeing from equities and back into gold.

With any number of conditions that could prompt a relief rebound or partial recovery for oversold gold prices into the new year, at least some respite from the carnage could be on the near horizon. Currently consolidating its recent losses around a tight $1120-$1140 range, the price of gold has begun to approach major psychological support around the $1100 level. If gold is able to hold above this key support level, there is a clear potential for a relief rebound back up to target $1200 resistance.