Gold Forecast: Prices Could Weaken Further Before Bottoming in September

The odds for another 0.75% Fed rate hike have risen to around 70% over the last week. This has pushed short-term interest rates and the dollar higher. Gold is slipping back towards critical support. Our cycle work expects one final dip into a September low.

With gold futures slipping to $1720 intraday, it’s time to revisit the cycle count and potential scenarios for September.

GOLD CYCLE: Gold has been forming cycle lows every 40 to 44-trading days (blue arrows). What do all these lows have in common? Fed rate hikes. The next low should arrive around September 14 (+/- a few trading days). Note- the next Fed announcement is September 21.

That means metals and miners could drift lower over the next 2, possibly 3-weeks.

Will gold break the July $1678.40 low in September? With futures just $50 above long-term support at $1675, the odds are starting to support a temporary breach.

Possible Capitulation

With gold prices weakening and approaching long-term support - we are entering a potential zone for capitulation. Capitulation is when bulls lose faith, turn bearish and exit the market.

Institutions often nudge (manipulate) prices below a significant psychological or technical level to create a selling climax. The selling climax provides the necessary spike in volume allowing [big money] the cover to switch from shorts to longs and maximize profits. Unfortunately, retail traders unaware of these tactics will often sell at or near the bottom.

Below are three scenarios for September:

Base Case Scenario: Gold dips temporarily below $1675 in September, perhaps reaching $1650 or lower. Retail traders capitulate, prices bottom, and start a new uptrend.

Bullish Case: Gold stands firm and holds $1675 through September. That would support a bullish run and retest of $2000 by year-end.

Bearish Scenario: A September capitulation triggers a cascade of sell orders forcing gold below $1600 temporarily. I see this scenario as very unlikely.

Physical Demand

A spike lower in the paper price of precious metals is almost always temporary because low prices trigger a surge in real demand.

Savvy investors taking advantage of the artificially low prices buy up all the available inventory; a form of bad money (paper price) driving out good (physical metals).

The demand spike causes supply shortages, and the paper price is forced to recover. Sometimes prices will slingshot in the other direction if supply is overly tight (like 2020).    

Final Thoughts: The headwinds of rising interest rates and a strong dollar will abate in September after the final 0.75% hike.

Gold could dip to fresh lows temporarily, but we view that as a buying opportunity. Our cycle work expects a bottom in mid-September.

AG Thorson is a registered CMT and expert in technical analysis. He believes we are in the final stages of a global debt super-cycle. For regular updates, please visit here.

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