In retrospect, we should have known gold prices were destined for a sizeable pullback as of late February. A key line in the sand was in place, and besides, the underpinnings for weakness from gold futures and instruments like the SPDR Gold Trust ETF (NYSEARCA:GLD) have been crystal clear for months. That is, interest rates are on the rise, and the Federal Reserve is sooner or later (and sooner than later) going to back that move up by upping the Fed Funds Rate.
There is some good news on this front though … maybe. A major technical floor awaits the bears. Let’s just hope the U.S. dollar plays along and at least gives the precious metal a chance to recover.
Right on Cue for GLD
Some were calling it the rekindling of a much bigger rebound, when gold and related gold stocks like the Direxion Daily Gold Miners Bull 3X ETF (NYSEARCA:NUGT) reversed a selloff in late December. All told, GLD rallied 12% from then through late February, reigniting hopes for a major run-up in gold prices.
It wasn’t meant to be, though. Gold bumped into a rarely watched Fibonacci line at $1264, and that’s all it took to roll the rally over. Gold has since given up more than 4% of that peak price.
Fibonacci retracement lines are the market’s — and nature’s, and mathematics’ — inherent repeated patterns. For stocks, it means there’s a natural tendency to backtrack 38.2% and 61.8% of a move.
In this case, the move is the span between the late-2015 low of $1,066 and the mid-2016 high of $1,387. The 38.2% retracement level from that high is $1,264, where gold prices topped a couple of weeks ago. Granted, it had already fallen back below that mark months ago, but once a Fibonacci line is established it’s always capable of coming back into play.
And in this case, it did.
With that as the backdrop, the odds that the other Fibonacci retracement line at $1,189 could also come back into play are high enough to bother mentioning it now (now that gold prices are on an intercept course with that level). Should that potential floor fail, there’s not much else to keep it propped up. That’s a scenario which would favor a trade like the Direxion Daily Gold Miners Bear 3X ETF (NYSEARCA:DUST).
Of course, while gold is subject to the market’s whims at its key Fibonacci levels, its future ultimately depends on where the U.S. dollar is headed.
Stronger Dollar, Weaker Gold
Gold’s rally over the course of the first half of 2016 was largely predicated on the assumption that the dollar’s modest weakness then would turn into something bigger. It didn’t. As the chart of gold and the U.S. Dollar Index below clarifies, not only did the greenback not tank, at rallied on to new multiyear highs in December. That rally cooled off for a while, but was rebooted in early February. By late last month, gold bugs finally began to accept that reality.
As unlikely as it may seem the dollar has any room to head higher, an impending series of interest rate hikes from the Federal Reserve is apt to do exactly that; interest rates and currency move in tandem.
Bottom Line for Gold
While traders have to respect the potential support at $1,066, between gold’s sheer bearish momentum and the dollar’s foreseeable future (not to mention that gold prices didn’t halt their pullback the first time they fell into the line at $1,189 in November), the near-term outlook isn’t encouraging.
The $1,189 level is a last-ditch support line. Below that, and things could get real hairy, real fast.
This coming Wednesday’s interest rate decision from the FOMC could really stir the pot, so to speak.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.