The gold market is moving lower this morning in early action to kick off the new trading week. Stocks and crude oil are also lower while the dollar index is higher.
The gold market is likely seeing additional profit taking following recent gains. Such profit taking and back and fill trade is to be expected following gold’s recent rise and could potentially be a precursor to more gains ahead.
Sentiment towards gold has seen a significant shift in recent weeks. The U.S. Federal Reserve has elected to hold off on raising interest rates — at least for now — and many feel the likelihood of a rate hike before year’s end has diminished significantly. This has led to a weaker dollar index and higher gold prices. Sentiment surrounding gold had been very bearish, but recent developments appear to have caused that to change. According to recent CFTC data, large speculators have cut short positions and added to long positions. In fact, they reported a 68 percent increase in net long positions which represents the highest level seen since May.
The question, however, is will the gold market be able to sustain recent upside and buying interest. While the market is likely seeing a boost based on the notion of the Fed holding off on rate hikes for longer, the central bank will, at some point, start to raise rates. At this point, however, lift-off may possibly be on hold until sometime in 2016. Gold has, in the meantime, cleared some significant overhead resistance and appears poised for more gains.
The dollar index has been closely watched by investors in recent trade and could possibly fuel further upside in gold and other precious metals. While the index is seeing a bounce today, it is not far from retesting some key lows. Should the dollar index breach these lows to the downside, the market could potentially begin another significant leg lower in price. Should this occur, gold and other precious metals may see further buying interest as gold becomes relatively less expensive for foreign buyers in the face of a weaker dollar.
Global equity markets could also potentially drive gold and other precious metals. Although stocks have largely recovered from volatility seen in August and September, the markets may remain vulnerable to any significant selling or volatility coming out of China. Should equities show signs of weakness again, it could potentially pave the way for higher gold as risk aversion takes hold.