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December 2019 gold price prediction

By David Becker

Will prices continue to grind lower during this month?

Gold prices have been trading sideways since breaking out and finding a new range in June 2019. Prices initially explored higher levels, but the tension related to the US-China trade war and geopolitics has kept prices range bound. Additionally, the US dollar has gained ground during the same period, weighing on gold prices and discouraging any upward momentum. Gold sentiment also remains bullish, as managed money is long and looking for higher prices. Gold traders are also complacent, pushing gold implied volatility to the lowest levels seen since June of 2019. With gold fundamentals, technicals, and sentiment mixed, prices will likely continue to grind lower during December 2019.

The fundamentals

The rally in gold prices started to lose its steam in September 2019. This coincided with monetary policy decisions that pointed to additional stimulus from the European Central Bank and fewer rate cuts than expected by the Federal Reserve. This allowed the dollar to gain traction, which weighed on gold prices. In addition, during Q4, the markets started to price in a situation where the US-Chinese trade war would come to some form of resolution. Both sides announced a phase-1 deal that removed some of the geopolitical premia incorporated in gold prices.

The Fed stated during its latest FOMC meeting that the hurdle rate for additional rate cuts had increased, making it more difficult for the Fed to reduce short-term interest rates based on incoming data. With the US seeing record Black-Friday online sales, and job growth remaining near trend, it’s hard to see the Fed cutting rates any further. This sentiment has been reflected in the US two-year yield which has increased by 25-basis points during the last month to 1.63 per cent after hitting a low of 1.38 per cent in October 2019. Positive consumer spending is likely to keep the dollar buoyed which could continue to weigh on gold prices.

The technicals

Gold prices have eased since hitting their 2019 highs in early September, and are hovering near trend line support which comes in near $1,452. Target support is the November lows at $1,445. A break of this level would lead to a test of the July lows at $1,385. Both short-term and medium-term daily momentum is neutral. The fast stochastic (which is a momentum oscillator) has bounced after recently generating a buy signal, but there is little acceleration. The MACD (moving average convergence divergence) index is poised to generate a buy signal but has a flat trajectory that points to consolidation.

The weekly chart of gold shows that prices broke out in June 2019 and settled into a new range that is capped at $1,558. The lower end of the weekly range is seen near $1,391. Weekly prices are oversold. The fast stochastic is printing a reading of 14, below the oversold trigger level of 20, which could foreshadow a correction. Medium-term momentum is negative as the MACD histogram is printing in the red, with a downward sloping trajectory which points to lower prices.

Sentiment

Sentiment describes how market participants feel about the price of an asset. It has two extremes: fear and greed. The fear component in the gold market generally is associated with higher prices (which is opposite to the direction experienced with riskier assets such as stocks), and complacency is reflected in lower prices.

One way to measure gold price sentiment is to evaluate the implied volatility that options traders use to determine gold options. One of the best ways to measure gold implied volatility is the gold VIX. The gold VIX measures the implied volatility of the “at the money strike price” of gold options.

The chart of the gold VIX shows that implied volatility has declined after reaching a peak in September. Over the past two years, the gold VIX and gold prices have moved in tandem but have diverged in November as implied volatility has declined approximately 30 per cent, while prices have remained stable. Gold volatility shows that options traders believe that prices will continue to remain stable or decline. The gold VIX still remains 16 per cent above the lows seen in June 2019.

Additionally, managed money remains bullish, which is reflected by their long positions in futures and options. Open interest, in the managed money category, that is long futures and options is more than 10-times larger than the open interest that is short, in the managed money category. This is the largest difference in the past two years and leaves the gold market vulnerable to long liquidation.

Looking forward: Gold price this month

Gold prices will likely face headwinds during December especially if riskier assets continue to benefit from low-interest rates and positive consumer sentiment. This type of environment will help buoy US yields and the dollar.

The short-term technicals are neutral and point to continued consolidation. The weekly technicals show that prices could bounce off support given that weekly prices appear to be oversold.

Gold price sentiment is mixed but is set up for additional volatility. Options traders believe prices will remain range-bound, and the low level of gold implied volatility could lead to a price spike if there is an impetus that drives prices higher. What is also clear is the hedge funds (managed money) are long futures and options and a technical breakdown could lead to long-liquidation.

Risks

The risk for the bulls is that the dollar benefits from stronger than expected US economic data. This will eventually weigh on gold prices, potentially leading to a technical breakdown and a long liquidation.

The risk for the bears is that the VIX is at low levels, and any impetus, including both the US and China walking away from the trade table, could generate upward momentum, and a short squeeze. The most likely scenario is that prices continue to trade sideways to lower during December, testing the lower end of the trading range.

FURTHER READING: Gold price predictions for 2020 and beyond

FURTHER READING: Silver price forecast 2020 and beyond

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