On the macroeconomic front, the major event for the week ahead is the Federal Reserve’s once-per-six-week meeting on Wednesday. An announcement on the interest rate and monetary policy is due at 2 pm EST.

With the recent weakness in both US stocks and bonds, this is perhaps the most uncertain meeting since the central bank began hiking rates in December 2015. Although, certainly the most contentious since Chairman Jerome Powell took over for Janet Yellen in February 2018.

We can see the uncertainty in the form of the low 76.6%. Odds that the futures market is pricing in for the possibility of a rate hike on Wednesday. These are the lowest odds prior to a widely-anticipated rate hike since the current cycle began in 2015.

What is causing doubt amongst traders regarding the upcoming meeting?

Of course: recent weakness in US stocks. As well as the resulting language by chairman Powell at the New York Economic Club meeting in November that interest policy had approached a “neutral rate” at present levels.

Fed’s “Normalization” Campaign in Jeopardy

Even with the reduction of nearly $400 billion from its balance sheet since the central bank’s “normalization” policy began in June 2017, it would still take the Fed six more years to return its total assets to the quantity that would have been achieved had it not implemented any of the drastic bailout policies post-2008:

Already, we see that the relatively insignificant reduction in the Fed’s balance sheet has resulted in the wild gyrations observed in recent months in bonds and stocks, as discussed in recent articles.

Do we really think the Fed can return to pre-2008 policy and not crash the markets?

 

Gold Technical Update

Although we see much instability in world markets which should be supportive of precious metals over the near term, the prices of the metals must always be analyzed on their own; this discipline ensures that we never over-emphasize signals which may appear in the cross-currents of world events.

For the week, gold finished lower by 0.9% or $11 to close at $1,241 as of the final trade on the New York COMEX on Friday afternoon.

Since the August bottom in gold at $1,160, the price action has been defined by an orderly rising channel, shown below in the teal color (dashed channel). Note how the price has bounced back and forth between the upper and lower boundary of the channel, up through the most recent upper hit over the past week at $1,256, where gold encountered resistance.

Fed Meeting Ahead & Gold Technical Update

This recovery channel must be respected until proven otherwise. The channel’s upper resistance level now comes in at $1,263 for the week ahead. Minor support exists between $1,237 – $1,242, representing the peaks from October, now exceeded. More significant support exists at the lower boundary of the (teal) recovery channel, at $1,209 and rising.

However, it is here that we must remember the intermediate-term picture. Gold had broken down from its rising 2015 – 2018 trend in July (royal blue line). In general, when a broken trend is re-tested, we expect sellers to show up again. As they did the first time the trend broke. These are often former buyers who look to sell near break-even. Now that the price has returned to near their entry point.

The point is: gold should encounter resistance at the formerly broken trend (royal blue), which now comes in at $1,285 and rising.

When a valid rising channel that is providing support meets with a broken former trend that is expected to provide resistance, by definition one of those trends must break. At this point, we should place the bias that the longer-term trend will hold prices lower because in general, the longer the trend the more significant.

 

Takeaway on Gold’s Technical Chart

In sum then, when gold gets back into the range of its broken trend near $1,285, we expect an intermediate-term top to form. Then for the subsequent decline to take prices back below the recent August bottom of $1,160. From there, we will look for a more meaningful bottom to form in 2019.

This is the language of the charts. What will cause gold to form a top? Perhaps stability in the stock market following a Fed interest rate pause. We cannot say for sure, but we can assess the visible trends on the charts.


CHRISTOPHER AARON
BULLION EXCHANGES MARKET ANALYST

Christopher Aaron has been trading in the commodity and financial markets since the early 2000s. He began his career as an intelligence analyst for the Central Intelligence Agency. 

Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy has helped his clients to identify both long-term market cycles and short-term opportunities for profit.

This article is a third-party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.

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