Gold struggles to shine

Although pure gold will not tarnish, the price of gold in the past month-and-a-half has shown an extreme inability to shine, as it has plunged from mid-October to progressively lower multi-year lows.

Most recently, the precious metal established well more than a five-year low at $1052 this past Friday, a level not seen since a pivotal hammer candle in the same price area around $1050 in February 2010 marked the launch of a prolonged bullish run.

While that turn to the upside from around the $1050 level did indeed occur in 2010, it would be difficult to imagine the same type of upside reversal from this level in the current market environment. This is mostly because the US dollar has continued to strengthen relentlessly, largely due to broad market expectations that the US Federal Reserve will likely raise interest rates during its December meeting in a couple of weeks. Since gold is denominated in dollars, a rise in the value of the US dollar generally means a drop in the value of gold, when all other factors are kept constant.

In addition, although gold has traditionally been seen as a “safe haven” asset, where investors have tended to buy gold during times of turmoil and volatility in the equity markets, this “flight-to-safety” mentality has not held up well recently, as elevated market volatility in the past several months has generally failed to push up the price of gold.

Of course, gold prices have been in a general downtrend for at least the past four years, since the $1900-area highs in late 2011. The noted plunge since mid-October, however, has been especially brutal for many gold investors seeking a long-awaited bottom for the precious metal.

The first part of the current trading week has seen a relatively weak bounce so far from the $1050 support area. While the start of a prolonged bullish run is very highly unlikely at this point, a minor relief rally could possibly be in the making.

Any potential rebound, however, will depend largely upon the fate of the US dollar in the coming days and weeks. As mentioned, the major market-mover this month is likely to be the Fed meeting in mid-December, when a decision will be made as to whether or not US interest rates will rise.

Before that potentially pivotal event, however, will be this week’s Non-Farm Payrolls and Unemployment Rate reports on Friday. An employment picture that meets or exceeds expectations will further support the case for a rate hike, and should lead to further dollar support and gold weakness. This scenario could lead to a breakdown below $1050 support and a target immediately to the downside around the $1025 level and below.

Only a significantly worse-than-expected job situation could cast some doubts over the upcoming December Fed meeting, thereby potentially prompting a short-term dollar pullback and further relief rally for gold. In the event of this relief rally, the major upside objective and resistance barrier resides at the key $1100 level.