Gold melting away as Fed hike expectations heat up

How low can it go? There is still no end in sight for the falling prices of gold. The metal is now down for the fifth consecutive day after forming a key reversal pattern on Wednesday of last week on the back of a more hawkish than expected FOMC statement. The markets have since been pricing in a higher probability for a rate rise in December and the dollar has correspondingly gained ground. The US currency could sharply extend its gains if this week’s key data from the world’s largest economy show positive surprises, especially Friday’s monthly jobs report. Helping the dollar further is the mostly dovish central banks elsewhere, including of course the ECB which could expand the size, composition and duration of its QE programme in December. Negative interest rates in many other countries, including Switzerland, are also bullish for the dollar.

Unfortunately this is bad news for the buck-denominated gold and silver prices, especially since there are little or no signs of rising inflation rates. With yields being universally low, investors are continuing to find better value in stocks rather than gold or silver, which pay no interest or dividends and cost money to store. As investors continue to allocate growing proportions of their trading capital in assets that pay higher yields, precious metals will likely remain out of favour for the foreseeable future.

That being said, the physical demand for both metals should continue to rise over the long-term as the likes of India and China’s populations grow and their citizens become richer. Indeed, there is a danger that the on-going money printing and ultra-loose policies of the major central banks will overcook global inflation, which could be very good news for gold in the medium to long term. But in the short-term, the dollar will continue to dominate the agenda and as such we should see increased volatility around the release of the upcoming US data this week.

From a technical point of view, the bulls must have been disappointed when gold failed sustain the rally after it took out a key bearish trend line and as it fell back below the key $1170 and $1150 technically-important levels. These levels may now turn into resistance upon re-test. The metal is now heading towards another key support around $1120/21. This area is where the topside of the broken bearish trend meets a rising trend and the 61.8% Fibonacci retracement of the most recent rally from $1077. So, it is a big technical level. It is likely that the metal may stage a short-term bounce here at the very least because it does appear a tad over-sold. However, a decisive break below here would end any short-term bullish hopes and lead potentially lead to another ugly sell-off.