Dollar Breakout And Gold Price Forecast

Tuesday, December 20, 2016

The US dollar took the opportunity of the Fed rate hike last week to advance further from the developing breakout we were observing over the past month. The dollar surged over 1% after the hike, eclipsing the 102 level on the Dollar Index and finally closing near 103 by Friday.

The breakout looks successful, and we now have an intermediate-term target for the dollar at 108 on the Index.

Gold and the precious metals are expected to be under pressure through the remainder of the dollar's advance toward 108, although it is not true that the two must move opposite the entire time: there are distinct episodes in which the dollar and gold will move in the same direction. So while we will remain cautious on the precious metals until the dollar approaches its intermediate target, it is likely that gold will attempt to establish its intermediate low before the dollar reaches its expected peak.

We are now within five points of the dollar intermediate target... and as, for example, the previous five points from 98 to 103 were gained in just six weeks, the next low for gold could roughly be expected to form within a similar timeframe.

Gold Price Update

Turning to gold itself, for the past week the historical store of wealth was down $24.50 from a week prior, or 2.1%, to close at $1,137 as of the final trade on the New York COMEX.

The 3-year timeframe continues to be most relevant perspective for us, as it gives the proper view of the full 2013-2015 broken trend channel, which is now going to be providing support when gold approaches it from the top:

The metal is due for a short-term bounce at any moment. The RSI indicator, which appears at the top of the chart above, is once again in oversold territory below the 30 level on the indicator. Such a reading has marked several intermediate lows, including the 2015 bottom. But given the expected strength in the US dollar over the next six weeks, we do not believe a short-term bounce will represent the final low -- yet.

We are still anticipating a double bottom to form for gold, within the vicinity of $1,045 - $1,080.

The main question that we have at this juncture is: which path will gold take to reach its double bottom potential?

With the above question in mind, the two most-likely scenarios that we see at this point are highlighted in green on the chart above: A) a short-term bounce back up to $1,173 - $1,200, before a final drop into the low between $1,045 - $1,080, or B) a continued grinding decline toward the double bottom. Each of these scenarios should take roughly the same amount of time to play out -- the only variation will be in the volatility seen on the way there.

Gold Miners Update

The relative outperformance of the miners over the metals themselves that we had been observing for the past four weeks was given up this week, as the miners fell to new lows after the Fed vote. This was exactly where it "should" have fallen on a technical basis when we study the chart below.

For the week, the miners index was down 6.6% to close at 165 on the HUI.

Note how the big plunge last week on the HUI gold miners index came just at the upper declining trendline (teal color) on the chart. These very well-defined trendlines are now critical for us to monitor for clues on when the declines in both the metals and the miners are going to terminate.

The Head & Shoulders topping pattern we have been monitoring since early November (blue callouts) continues to remain in play, and must be respected until proven otherwise. The target remains 95 on the HUI -- or in other words, a retest of the 2015 lows.

However, we are beginning to see, even at this early juncture, evidence that selling pressure in the miners is beginning to fade. Note the shape of the lines defining the downtrend, shown in teal. As the lines begin to converge, this bottoming "wedge-shaped" pattern is exactly what we would expect to see as a decline reaches its later stages.

Bottoming wedges are difficult patterns to identify. They go undetected by many, especially because sentiment turns so sour against the sector as the pattern progresses. However, these wedges, when they resolve to the upside, do represent bottoming patterns, as the lesser slope of the lower trendline indicates buyers are stepping in at relatively higher levels than sellers at each subsequent drop. At a certain point -- usually no more than 75% of the way through the wedge -- we expect buyers to overwhelm sellers and an intermediate low to form.


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Christopher Aaron

Christopher Aaron began his career as an intelligence analyst for the CIA and Department of Defense. He served two tours to Afghanistan and Iraq between 2006 - 2009, conducting pattern-of-life mapping for military leaders.

Mapping shares similarities with technical analysis of the financial markets because both involve the interpretation of repeating patterns found in human nature. He is the founder of iGold Advisor, providing research on the precious metals, and iGlobal Analytics, featuring technical analysis of the global capital markets.

Christopher speaks regularly on the cyclical patterns found within the financial markets and on international policy. He has been featured in the New York Times and NPR news amongst other publications.