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Gold Prices Set For Further Losses Amid Rising Rate Hike Likelihood

Commodities / Gold and Silver 2016 Oct 17, 2016 - 06:11 AM GMT

By: AnyOption


After briefly crossing back below the critical $1250 per troy ounce level again on Friday, gold are once again poised to experience an extended period of losses on the back of rate hike speculation.  Even though Wall Street was not pleased by the latest jobs figures reported earlier in the month, expectations are for inflation to continue trending higher, adding to the case for the Federal Reserve to raise rates in December.  While there are still significant developments that could derail the possibility between now and November, namely another slowdown in US fundamentals, the external risk factors that emerged over the summer have since tapered.  The US dollar continues to reflect this sentiment, increasing the probability of tighter monetary policy and improving opportunities in fixed income investments, reducing the value of holding gold as a hedge.

Normalization Efforts to Rise

Even though the latest FOMC meeting minutes showed only moderate interest in tightening policy during the September Federal Reserve interest rate vote, the 7-3 vote narrowed dovish stance significantly. Furthermore, employment data that was roundly viewed as positive by key FOMC voting members, gave credence to the idea that despite some unevenness in economic activity, labor market conditions remain tight and improving inflation could be the harbinger of decisions to come. Furthermore, comments from Federal Reserve Chair Janet Yellen may indicate that November will be a “live” meeting. Considering more dovish members of the FOMC like Chicago Fed President Charles Evans are coming around to the idea that the economy can withstand higher rates if inflation and employment continue to improve, the stage looks set for one rate hike before the end of the year.

The rising probability of action on rates during December as indicated by the Fed Funds rates futures tracked by CME Group has sent the US dollar on a tear versus peers, with the US Dollar Index climbing to the highest levels since March earlier this month. According to futures pricing, there is currently a 67.50% likelihood of rates rising to the range of 0.50% to 0.75% in December from the present 0.25% to 0.50%. As rates rise, the dollar is also likely to benefit from the monetary policy tailwinds, continuing its recent grind higher and potentially breaking above a longstanding range which could force gold prices even lower from current levels. Furthermore, as the investment and economic climate normalizes with rising interest rates, the rationale for holding gold as a hedge against uncertainty during a prolonged period of low rates.

Technically Speaking

Looking gold from a technical perspective, the price action indicates gold prices might be temporarily oversold as evidenced by the relative strength index trending below the key 30.0 level.  The stochastic oscillator is also evidence that gold prices might be slightly undervalued.  Should the signal line (%K) crossover the %D line to the upside below the 20.0, it could signal a near-term pullback and correction to the upside, possibly as high as $1280.61 to $1304.85 according to the Fibonacci levels taken from the September 22nd highs to the October 7th lows.  However, standing in the way of any progress and acting as resistance is the 200-day moving average which is trending above the price action just shy of $1263.00.  Furthermore, if the 50-day moving average crosses the 200-day moving average to the downside, it could be viewed as a “death cross” which is typically accompanied by extremely bearish price behavior.

When looking for cues for how effectively trade gold, one of the best indicators is the correlation between the US dollar index and gold.  Thanks to a historically strong inverse relationship between the two assets, if the dollar continues its most recent ascension, gold prices could continue their precipitous fall.  Generally, a strong correlation implies a correlation coefficient ranging between 0.75 and 1.00 and -0.75 and -1.00 in the case of an inverse relationship.  The present -0.8887 inverse correlation implies a significant relationship between two assets, indicating that any further gains in the US dollar on the back of rate hike talk will further reduce gold’s value over time.  With a descending triangle pattern setting up with $1250.00 as support, any candlestick close below this level that is accompanied by renewed momentum and trading turnover should be viewed as bearish over the medium-term.

Looking Ahead

The major event coming up that could provide a further catalyst for heightened rate hike odds is consumer price inflation data due in the sessions ahead.  September 18th will see the release of headline and core annualized CPI figures, with the former expected to show significant upside gains while the latter steadies.  Should consensus expectations be met, this will be another feather in the cap of the Federal Reserve in its drive to raise rates once before the end of 2016.  However, a disappointment could very well see rate hike odds tumbling despite the weeks of data still due before the December FOMC decision.  In the meantime, should the dollar respond positive to data, the downward pressure on gold will likely stay intact, forcing prices back towards $1200.00 per troy ounce.

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