Gold is slightly higher this morning in early action as stocks are once again exhibiting some weakness. Crude oil prices are lower while the dollar index is also losing ground. Gold may potentially see a period of consolidation following recent gains. If stocks see another severe round of volatility, however, gold may see further near-term upside as risk aversion increases.
The stock market clearly seems to be feeling the “heat” from a potential rate hike. Although this week’s FOMC meeting minutes were considered by some analysts to be dovish, there remains a great deal of uncertainty over the central bank’s plans. This uncertainty may continue to weigh on markets until there is more clarity. While a December rate hike is a possibility, there is likely speculation that the Fed could hold off on raising rates until next year. In addition, concerns over the Chinese stock market are taking a toll on investor sentiment. Adding insult to injury, the price of oil continues to drop. Crude oil is now flirting with the $40 per barrel level, a level not seen in 6 1/2 years. There is the possibility of even more downside in crude oil prices, and some traders believe oil could possibly fall as low as $25 or $30 per barrel. The ongoing sell-off in crude may keep energy companies under pressure and thus the broader market, as well. Risk aversion seems to be taking a greater hold, and unfortunately, there could be additional volatility on the horizon. Gold is now at a multi-week high as investors look for alternatives and as short covering is featured.
The large short position in gold appears to be in the midst of being unwound and further short covering could potentially fuel the rally even further. In addition, further selling and volatility in global equity markets may also spur buying in gold and other precious metals.
The gold bulls have taken control of the market from a technical standpoint, and the daily chart may potentially point to further upside. Previous support in the $1180 area may be a possible target for the bulls, with a break above that level possibly seeing $1230 as another target.
The $1180 area may be a good test for the gold bulls and may show the rally to be more convincing if this level is breached to the upside. While some analysts believe that any large rallies in gold are likely to be sold into, the change in investor sentiment in recent days has the potential to drastically change the outlook for the yellow metal.
