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This is How One Trader Would Play Gold Ahead Of The Fed

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(Kitco News) - The gold market is following a familiar pattern: falling ahead of the Federal Reserve interest rate, and one trader sees the current sell-off in the yellow metal as a buying opportunity.

In a recent commentary on Seeking Alpha, Andrew McElory from Matrixtrade, said that the last two December Fed rate hikes have been followed by gold rallies, which is why gold traders shouldn’t fear the central bank a third time.

“In 2015 and 2016 the December low also happened to line up with a Fed rate hike," McElory said. “The extended sell-off into the hike combined with overly bearish sentiment led to significant reversals."

He added that he sees the same scenario setting up again as gold trades at its lowest level in more than four months, down more than 7% from its September high.

In his commentary, he said that he sees the range between $1,250 and $1,2600 as a good entry point for gold traders. He added that traders could start with a small position and build as prices rally. He said he sees $1,270 as the next entry point with an ultimate target of $1,357 an ounce.

"Since the conditions are right for a December reversal, I am looking to buy gold for a move back over $1300 and towards the $1357 high. I don't think it can make a new high, but I can always change my mind during the rally; what I want to know now is that there is enough potential reward to justify the risk of buying," he said.

McElory said that he also recommends using a wider stop at $1,230 an ounce so the trade isn’t stopped out because of potentially higher volatility surrounding the central bank decision.

"Gold is selling off ahead of next week's expected rate hike and sentiment in the precious metals is pretty sour. But all is not lost. The same set-up has been present for the last two years and both times they led to a significant rally. Gold buyers have no need to fear the Fed," he said.

December gold futures have dropped through key support levels after breaking below its narrowest trading channel in more than a decade. According to analysts, a stronger U.S. dollar ahead of Dec. 13 monetary policy decision is helping to weigh down the yellow metal.

CME 30-day Fed Fund futures are currently pricing an almost 100% chance of a rate hike. February gold futures last traded at $1.255.20 an ounce, down 0.86% on the day.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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