We seem to have settled in just a bit over the last couple of weeks, and while the downtrend since the U.S. election is still in place, we have had a few days respite from the selloff and seem ready to challenge the downtrend to the upside.

So far, gold has tested and rebounded the $1,170 support that stems back from mid-2015 bottoms, and U.S. rates seem to be taking a breather, with the 10-year stuck around 2.4 percent and DXY hovering north of 100. We are only eight days from what is almost certainly the long-awaited dovish hike from the Fed, and we are more than academically interested in what the commentary and interpretation around the event will be like.

Bull Case

  • Gold slightly oversold with 14-day RSI maintaining the 29 levels that have been consistent throughout November and early December. October's dalliance with "oversold" brought about a $40 rally.
  • Extreme put skew (15d 1m RR -4 to -2.5v) has eased somewhat, which has a decent correlation with short-term lows historically.
  • Silver may begin to outperform gold again with banks tripping over themselves to upgrade industrial-use metals.
  • Economic data is not yet great but can easily be considered good across the board. A "high-pressure" economy may be here before we know it.
  • Counter to what I had previously thought, the net delta of options open interest in the market is actually negative. Calls may be more popular, but they are deeply out of the money. A lot of insurance purchased on the gold market has profited nicely.
  • Not a lot of futures spec longs left to liquidate, as we have returned to more sustainable long-term levels.

Bear Case

  • Still holding downtrend from post-election hysteria. Resistance from top of trend is currently around $1,180-$1,185.
  • S&P 500 VIX has gotten crushed below 12, threatening the lowest levels of the year. Not a lot of risk-haven seeking in that sort of environment.
  • Gold ETF outflows are the only thing more consistent than Dak Prescott. Down roughly 8 percent from peak levels (election night).
  • December 14 rate hike is practically inevitable at this point.
  • Inflation concerns do not yet seem to be bullish for gold based on what we have observed from headline releases and the follow-through moves. Long-term development.
  • The OPEC cut agrees to a level that is 1 million barrels per day above what they were producing in January. With a steep contango curve (over $1 January-February) and U.S. production coming back online, we may have seen the end of our oil tailwind for the commodity complex.

Chart 1

We are roughly in the top 10-20 percent of bullish surprising econ data as a broad indicator since the Great Recession. An important caveat: We have been here before and obviously failed to achieve "escape velocity," but broader indicators like the Atlanta Fed's GDPNow indicator (not pictured) are also giving bullish signals.

A 4.6 percent U-3 rate and even 9.3 percent underemployment rate indicate that the Fed's strategy of a high-pressure economy may manifest itself quicker than many anticipate. It will be interesting to see the transition from accommodative monetary policy to a supposed era of accommodative fiscal policy in the U.S. among infrastructure spending, all while the ECB tries to quietly get off their own QE train.

Chart 2

The last two years, in pictures. The white line is JPM's estimate of global weighted aggregate yield for sovereign debt (inverted y-axis). The visual correlation with gold prices is unlike most any other indicator I have found.

Since the start of 2015, there has only been a roughly six-week period of divergence between the two, and that gap eventually closed. It makes sense as well from a fundamental demand standpoint: As negative yields became pervasive throughout developed nations, gold has a negative opportunity cost, making it effectively a yielding asset. Put simply, "I don't have anything else to buy, and the money markets are charging me, so ... gold!"

As that trend has faded, we have seen the $200 drop from $1,360 to current levels. As gold has outperformed this year versus what you would expect with the backdrop of dollar strength, ETF liquidations, futures net positioning, weak jewelry demand and a practical removal of India from the demand markets, this may be the straw that breaks the back.

If anything could push us south of $1K spot prices, it would be higher global rates.

Coin Toss

With rates, risk and dollar taking a breather, we have some moderate bullishness here, especially if we break the immediate resistance from the downtrend at $1,180-$1,185. Support at $1,165-$1,172 now means for a tight window. Busy slate of Tier 2 econ data between now and Dec 14, but could go quiet with the Italian vote over with. Higher.