Is gold set for another leg lower?

Gold has been rallying sharply over recent weeks. However, with fundamentals and technical considerations taken into account, there is an argument for a bearish reversal in the near future.

Gold bars
Source: Bloomberg

Gold has been on a strong run in recent weeks, with the precious metal reaching a new 47-day high this week. While the short-term picture remains very one-sided, there is a wider perspective that could point towards a deterioration in gold prices in the near future.
One of the key determinants of the recent gains has been the decline of US economic data, which in turn has driven a looser monetary stance from the Federal Reserve, and ultimately a sharp devaluation of the US dollar. However, the end of 2017 could be a period filled with monetary tightening from the Fed, with a December rate rise expected, while the commencement of balance sheet normalisation could begin in September.                                                                                    
With such tightening it is likely we will see a return of a bullish dollar scenario, which could be detrimental to the price of gold when coupled with higher rates. Typically interest higher rates are associated with a risk-on environment, and with gold perceived as a safe haven.
The continued rise in US interest rates should reduce the value of gold. On the charts, there is a clear rounding formation in play over recent months, with the creation of higher highs and higher lows seen throughout the first half of the year now giving way to flatlining tops, which was followed by a break to a new lower low back in early July, the first we have seen of 2017.                                                        
Interestingly, we have seen a number of 76.4% retracements respected over the past year, and it is this level which is once more coming into play, with the price currently on the 76.4% ($1274) pullback. Looking at the stochastic, we have seen the breaks back up through the 20 mark as strong buy signals, while the drops back below the 80 mark have provided strong sell signals. With that in mind, it could make sense to wait for a drop in the stochastic back below 80 to provide a stronger sell signal. 

Daily gold chart

The price action seen over the daily timeframe shows a market which is rounding off, while the longer (weekly) timeframe shows that the rally seen in the first half of the year has all been just one burst higher, set within a pattern of lower highs that dates back to the mid-2016 high of $1375. The stochastic is currently following the price, with the creation of lower highs and lows, and this indicator also points towards a potential move lower in the near future. 

Weekly gold chart

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