Gold prices at inflexion point, now at the mercy of the Fed, Wall Street and US elections

• Gold at an inflexion point, trading at extremes according to the COT report.
• Fundamentals shifting fro geopolitics to the US presidential elections and Wall Street. 
• Technically, gold is suffering below a very large bearish daily candlestick wick. 

Gold has been consolidating with a large speculative build up in the 1560s and the largest divergence between large speculators and commercials since Jan-March 2018, signalling that the market could be at an inflexion point. 

At the time of writing, gold is training at $1,560 having travelled within a range of between $1,556 and $1,562, down some 4.75% from the 8th Jan peaks of $1,611.34 following the largest bearish-wick since 9th Nov 2016 which led to an almighty sell-off of over 12%. (The same reversal would bring in the scope for $1,380s and the July 2018 double bottom support lows). 

However, before getting into the depths of the technical analysis, the fundamentals must be considered. Speculators were nervous into the year-end, but moe to the point, the US dollar took a tumble. Seasonally, the US dollar does pretty well at this time of year and a late advance in gold has taken the bulls down a peg or two. 

Geopolitical risk takes a back seat

Meanwhile, there seems to be less to be concerned about on the geopolitical front, at least for now, as we progress beyond the trade deal signing between the US and China, with the Iran/US threat on the back burners. The US impeachment trial will likely be a drama for those who want to sit through a televised yet gruelling hearing which will likely amount to nothing considering the Republican party hold a Senate majority, which means he will likely be acquitted. More on that here.

However, the markets will be tuned in to see how the House impeachment managers – in essence, the prosecutors – will try to convince senators that the president should be ousted from the White House, for abuse of power and obstruction of Congress – a potential risk-off theme for the coming days and gold supportive.  

US economy under a microscope on presidential election year

The week and weeks ahead will be crucial for the US dollar and gold prices when considering the global economy. The fact that the US and Sino trade deal realistically would have come into effect in business sentiment the moment the deal was announced mid-December 2019 will potentially start to penetrate the US economic data in good time. The Federal Reserve (expected to stay on hold in 2020, according to the dots) will be keeping a close eye on that and the US dollar will likely trade in tandem with the ebbs and flows of economic data outcomes, subsequently, leading gold either higher or lower. So long as the US stock market continues on its northerly trajectory and there are no geopolitical shocks along the way, the speculative build-up in gold's overbought position could pop and drop. 

On the other hand, the seriously disrupted global supply lines which the 22-month tariff war between the US and China are unlikely to be repaired anytime soon, as reported in yesterday's Global Times stressed:

• Bilateral trade between the world's two largest economies will nonetheless remain at single-digit growth in the new year, as the deal leaves in place punitive tariffs on about $480 billion goods from China and the US, which will stymie business investment and revival of confidence in all major economies. 
• Though China's pledge to purchase more than $70 billion worth of goods and services in the agricultural, energy, and manufacturing areas in 2020 will help the US economy a little, most of the costs relating to the tariffs on Chinese imports will be borne by Americans, in the form of lower profits for US companies or higher retail prices for households.

The Federal Reserve will be monitoring this closely, as will Wall Street. Distracted by the US Presidential elections this year, while 70% of investors are banking on Trump being reelected, should there be a change in sentiment, potentially on the back of a waning US economy due to what the Global Times warns of,  then that would be a very bad situation for US stocks and highly positive for gold prices.

US 10-year yields and gold's correlation

And not least, this brings us to US yields. What is striking at the moment is how USD/JPY has been so robust, yet intermarket analysis screams sell when looking to the yield spread between Japan and the US. US yields are grinding lower, potentially propping up gold prices as we move through January. However, should yields revert on their northerly trajectory again, just as back in September's trend, the price of gold could fall back under pressure, at least until signs of inflation begin to emerge, but that is a whole other story potentially for somewhere down the line in 2020.

Gold levels

Gold, as already mentioned, has suffered a blow at the start of the year and could be subject to a substantial correction, if not a full out reversal of the May 2019 rally (at the extreme (not likely considering the fundamental risks this year and expected higher inflationary environmnt). The bulls are treading on this ice, suffering from the very bearish candlestick of 8th Jan which took the price to below the Sep resistance/support level of 1557 and to 1536. A break of the 21-DMA at 1537 ($10 shy of a 50% reversal of the Nov rally) opens risk to 1507, 1476 and 1445 on the Fibonacci retracement scale of the same Nov rally.