Gold Forecast: Threatening the Downside

I think the one thing that you should do is keep an eye on your position size, because the volatility is going to cause quite a bit of noisy behavior.

The gold markets fell a bit on Monday as we continue to hang about the $1740 level. This is an area that has been noisy over the last couple of days, so it’s worth paying close attention to how we behave when we are at the outer edges of the Friday candlestick.

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If we were to break down below the bottom of the candlestick for the Friday session, it opens up the possibility of a move down to the $1700 level. The $1700 level it’s an area that I think a lot of people will pay close attention to as it is a large, round, psychologically significant figure. The $1700 level being broken could open up the floodgates, allowing gold markets to collapse. At that point, one would anticipate that the US dollar would be very strong. After all, it is a major driver against the gold market right now, and I just don’t see that changing anytime soon.

With the Federal Reserve tightening its monetary policy the way it has; it has worked against the value of most currencies and has driven the US dollar so much higher. The interest rates in America continue to climb, so it does make quite a bit of sense that the US dollar has become much more attractive. Beyond that, we also have a lot of recessionary headwinds out there, and that has people looking to buy bonds.

If we do rally from here, and I do think that’s very possible, the $1800 level should be a significant amount of resistance. It was previous support, so “market memory” could come into play, especially as there is an uptrend line that slices through that area, and now should have resistance attached to it. In other words, if we were to rally from here, I would anticipate that the market will eventually show signs of exhaustion that we can start shorting. I have no interest in buying this market, at least not until we take out that wipeout candlestick from Tuesday of last week. If we break above there, then it’s likely that we could go much higher. Regardless, I think the one thing that you should do is keep an eye on your position size, because the volatility is going to cause quite a bit of noisy behavior.