We forecast that the majority of the month of October will be a matter of shorting rallies that show signs of weakening.

Gold markets have been very noisy over the last few months, and September wasn’t any different. The markets are still moving on the same basic fundamentals, including the Federal Reserve, interest rates, and the US dollar overall. After all, the gold contract is priced in dollars, so a stronger dollar working against the value of gold isn’t exactly a brave call at this point.

When you look at the interest rate markets, it is easy to see just how the strength coincides with the decline in gold. While most of us don’t have this issue, the larger funds have to think about the idea of storage and the costs involved with it. The fact is that if bonds offer a real rate of return, then why would they pay to store large quantities of gold? After all, bonds are simply either paper or electronic more often than not.

Gold doesn’t have the upper hand

Another thing to think about is although gold is sometimes thought of as a safety play, it really isn’t under most circumstances. It generally is looked at as safety in the sense that it doesn’t lose its purchasing power. However, there is no currency crisis – not in the USD that is – and therefore gold doesn’t have the upper hand. However, against the EUR, GBP, and JPY – gold has soared.

Looking at the chart, you can clearly see that the $1680 level was significant support for some time, and this had been reliable for the last few years. However, during the month of September, we finally broke through. This should not be overlooked, because this is a sign of things to come. In fact, there is an argument to be made for a potential move down to roughly $1280. (I am not calling for that – yet.)

• I believe that the majority of the month of October will be a matter of shorting rallies that show signs of weakening.
• I think we are more likely than not going to see a pullback in the USD during the month, but it will be short-term at best.
• This will cause the occasional bounce in gold, which will offer another selling opportunity.
• I don’t think gold will be a buy until the Federal Reserve changes its monetary policy, something that they are hellbent on sticking with for the foreseeable future.