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Gold December Seasonals

By Ashraf Laidi  |  12/12/2017 15:33
by Ashraf Laidi

Gold traders awaiting this week’s Federal Reserve decision are keeping a close eye on the all-important December seasonality in the yellow metal. In December of each of the last four years, gold put in a cyclical low. As gold drops to 5-month lows today, will it hit bottom this month, or more losses are in store for the next quarter?

Recall this same time last year, gold was heading for a 3-month consecutive decline, falling 18% on USD optimism emerging from market anticipation that president Trump’s planned infrastructure program would spur bond yields higher and lift inflation expectations, alongside a tax on US imports, which would favour home production and boost USD-bound flows. None of the above materialized due to Trump’s failure in passing either program.

Will it be different this time?

Yet even without last year’s lofty optimism in the US dollar, gold remains increasingly challenged. The latest selloff is partly caused by stabilisation in the US dollar emerging on tightening US labour markets and steady growth both permitting the Fed to remain on track for further interest rate hikes ahead.

But is there more? It can be said the latest surge in prices of cryptocurrencies has pushed many of the longstanding goldbugs (who wished to avoid central banks’ arbitrary debasing of fiat currency) into the likes of bitcoin, ethereum and litecoin, as these have performed far above and beyond the price of bullion. Net longs in gold futures contracts by speculators have hit 4-month lows at a time when interest in energy commodities increased rapidly.

The 20% increase in oil since the start of the year could work in favour of gold if inflation is expected to push higher without adequate response from the Federal Reserve. Instead of focusing on the US 10-year yield level of 2.40%-2.45%, we must focus on the extent to which yields exceed inflation (core PCE prices). This is known as the real yield, currently at 0.95%. Only a clear break above 1.05%-1.10% would translate into new momentum of gold selling, presented by bond yield’s eroding the power of bullion.

Key support

Gold is quickly nearing the $1210-15 key support, lying on the December 2015 trendline. We would have a to see a weekly and monthly close below $1200 to consider the sell-off conducive to the next low of $1130-35, a potential right-shoulder support on the inverse head and shoulder formation. The ability to hold near $1210 should raise chances of a gradual rebound towards $1300.

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