More Downside Potential In Gold Price - Another Buying Opportunity On The Horizon

London (Dec 1)  Since reaching the highest price since 2013 in early September at $1,559.80 per ounce, gold has been leaning lower. The yellow metal fell to its most recent low at $1,446.20 on November 12, and it was a lot closer to the low than the September peak on November 29.

The correction in gold continues to put selling pressure on the market, and we are likely to see lower levels before the precious metal finally reaches a bottom.

All of the reasons why gold broke to the upside before the summer remain supportive factors. Global interest rates declined and are not moving higher anytime soon. There has been no breakthrough in de-escalating the trade war between the US and China. The Middle East continues to be a hotbed of potential violence with US sanctions choking Iran’s economy. Another delay for Brexit pushed the deadline to the end of January. As we head into 2020, the US House of Representatives appears set to impeach President Trump as he prepares to run for re-election in what could be the most contentious contest in US history.

Gold continues to have a lot going for it these days, but the price action could be telling us that we have yet to see the bottom of the correction. I expect volatility to increase in the gold market in 2020 and remain bullish on the prospects for the price of the precious metal. For those looking for turbocharged instruments to trade gold on the long and short side of the market, the Velocity Shares 3X Long Gold ETN product (UGLD) and its bearish counterpart (DGLD) could be the perfect tools. UGLD and DGLD are triple leveraged, so they are only appropriate for short-term risk positions.

Gold broke out to the upside in June

Gold had traded in a $331.30 range from 2014 through June 2019.

The monthly chart highlights that gold moved above its level of critical resistance at the post-Brexit 2016 peak at $1377.50 in June. The price continued to post gains throughout the summer, reaching a high at just shy of $1,560 in early September. A rise in the total number of open long and short positions in the COMEX gold futures market accompanies the next leg of the gold rally. Rising price and increasing open interest is typically a technical validation of a bullish trend in a futures market. Monthly historical volatility moved from 5.58% in late 2018 to 14.30% in November 2019 as the monthly trading ranges have expanded. At the peak, gold reached its highest price since April 2013.

The rally ended in September

Gold ran out of steam on the upside in early September as a correction got underway.

The daily chart illustrates the current pattern of correction and consolidation in the gold market. Since reaching a high at $1,566.20 on the active month December futures contract on September 4, gold has made a series of lower highs and lower lows. The most recent high was at $1,520.90 on October 25, with the low at $1,446.20 on November 12. At the $1,460.50 level on November 29, the price is a lot closer to the low than the high since early September.

At first, the open interest metric rose as the price of gold declined in a sign that markets participants were buying the dip in the gold futures market. The metric reached a record high at 719,211 contracts on November 19. Over recent sessions, the metric has been declining and stood at 669,523 contracts on November 27 as the December futures contract was rolling to February. Some of the weaker longs have exited risk positions. Price momentum and relative strength indicators are below neutral readings. The pullback has caused daily historical volatility to drop from over 14.5% earlier this month to 5.83% as of November 29.

The weekly chart heads for an oversold condition

The weekly picture in the gold market looks like we could see a continuation of lower lows over the coming weeks.

The weekly chart shows that while relative strength is just below a neutral condition, price momentum is heading for oversold territory. The turn in open interest is another factor that could indicate that the current liquidation is shaking some of the positions from the market. The last time that the slow stochastic reached its current level was back in May before the gold market took off on the upside.

A higher low on the horizon

The first level to watch on the downside in the gold futures market is at $1,446.20. The November 12 low stands as short-term technical support for the yellow metal. However, the critical level on the downside is well below the recent low.

When gold broke out to the upside in June, the price blew by the July 2016 high at $1,377.50, which stood as critical technical resistance. Over the coming weeks and months, the former resistance level will stand as a crucial long-term support level in the gold futures market.

I expect that gold will not violate that level on the downside anytime soon. All of the factors that caused the breakout to the upside remain intact for the gold market. Global interest rates have declined and are not likely to move higher over the coming months. While the market is hopeful that a “phase one” trade deal between the US and China is on the horizon, there are still more than a few sticking points that stand in front of a serious de-escalation of the trade war. Iran continues to be a problem in the Middle East as US sanctions are choking the Iranian economy. And the 2020 presidential election in the US could create a circus of volatility in markets across all asset classes over the coming months. All of the ingredients for a higher low in the gold futures market remain intact as we head into the final month of 2019. I would be surprised if gold challenged its critical technical support level at $1,377.50, but that does not mean that it cannot continue to put in lower lows over the coming weeks.

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