Technicals:

Gold spent 2015 under distribution, steadily falling in a downtrend of lower highs and lower lows. Over the course of November and December, gold carved out a rounded bottom between $1,045 and $1,085. At the same time, RSI indicated the yellow metal had become oversold again, and later that downward pressure was easing.

A double bottom in Mid-December coinciding with the Fed interest rate increase and a higher low at the end of the year indicated that selling pressure had been washed out and accumulation was starting.

Over the last six weeks, gold has been trending increasingly higher. It climbed up through its 200-day average near $1,130 then cleared $1,185 to break out of its downtrend. After clearing $1,200 it quickly soared up toward $1,262 but in so doing, it became extremely overbought and due for a correction.

Recent trading suggests that a correction is underway. Gold found initial support near $1,190 and has bounced back up toward $1,210 stabilizing near the 23% retracement level of its recent advance. Additional support appears in place near $1,180 its recent breakout point and 38% retracement, then a Fibonacci cluster near $1,155. Upside tests appear near $1,220 then $1,235 and $1,265.  

 

Fundamentals:

The main reason gold declined so much in 2015 was because of the big USD rally. As the world’s premiere hard currency, gold tends to trade over the longer term in the opposite direction of USD the world’s premiere paper currency.

Toward the end of 2015, USD showed signs of peaking. The US Dollar Index remained below 100.00 when the Fed raised interest rates in December, a sign that several rate hikes had been priced in by the big USD advance.

Into 2016, USD has started to retreat, creating an opportunity for gold to rebound over the medium to long term. The Fed has been backing away from its previous plan of four hikes this year (which had been priced into USD) to creating more flexibility.

Recent comments about potential negative interest rates in the US while unlikely suggest that the Fed wants to keep a cap on USD even though the central bank remains relatively more hawkish than its peers. US companies have been complaining about the  negative impact of the high dollar on their earnings and it appears the Fed wants to make it clear that the Fed has tools to oppose countries that use negative interest rates to drive down their currencies at the Americans expense.

Volatility in world markets has also played a role in gold’s recent trading action. Fear in the market over oil, China and other factors have had traders looking for havens to park cash. With USD having moved up so much already, traders looking for cheaper havens have been moving into gold and JPY instead. With world stock markets stabilizing, capital has been moving back out again, a factor driving the current correction.

The World Gold Council recently indicated that gold demand has started to increase again, with particular interest coming from central banks and investment.

Overall, it appears that gold has turned the corner and that recent weakness appears to be normal backing and filling after a big breakaway rally. Short term gold may remain volatile and could correct further downward, but longer term gold’s prospects remain positive.