Like the stock market, gold is expected react sharply to the outcome of the debt ceiling impasse. But unlike stocks, gold tends to do well in fear-inducing situations. So if there is no deal on the debt ceiling over the next few days, then gold will rise—but if we get a deal before we hit the ceiling, then gold will drop.
Gold broke major support levels in early Friday trading but failed to follow through to the downside after putting in a low of $1,259.60—the lowest level since July. Investors showed support for the metal as Washington headed into a deadlock, but after it failed to rally when it had every reason to do so, investors fled to better-performing assets.
(Read more: Gold's plunge blamed on one massive sell order)
As Washington's stalemate continued Monday, gold was finding a modicum of support, trading back above the key level of $1,278.10. A close above here, and furthermore $1,285.90, will signal a consolidation higher. Only a close below $1,271.80 will signal a trade lower in the more intermediate term.
My advice now is to play the levels. Gold has fallen dramatically of late, and we expect to see a consolidation higher through the first half of the week.