Gold plunges as dollar rises equities reverse gains

Gold plunged almost 2% to a four-week low by Wednesday afternoon as the US dollar gained traction, especially against the Japanese yen, and equities markets reversed the substantial gains made earlier in the day.

The sharp decline on Wednesday pressured the precious metal below key support around the 1110 level to hit a low just slightly above 1101. In the process, the price of gold dropped sharply below its key 50-day moving average, above which it had been in a tight trading range since the beginning of the week.

Wednesday’s plummet constitutes the largest daily drop in two weeks, and shows the demand for gold in a weak state, especially in light of a strong dollar and ahead of next week’s pivotal Fed statement and decision with regard to a potential rate hike.

As the price of dollar-denominated gold is highly correlated with the US dollar, expectations of a rate hike either in September or December of this year have recently propelled the dollar while placing tremendous pressure on the price of gold.

The past two weeks of losses for gold constitute a retreat from a rebound high around the 1170 resistance level starting in late August. That high was the culmination of a two-week surge in mid-August that lifted the precious metal far above its July five-year low of 1077. The sharp surge was due to a combination of equity market volatility, a pullback in the dollar, and short-covering after the price of gold stagnated in a prolonged consolidation near its lows from late July to early August.

With market expectations of a Fed rate hike occurring either by the end of this year or at least shortly thereafter, the price of gold could very well have significantly further to fall as the dollar continues to be supported.

Further near-term losses could push the precious metal down towards major support around the 1080 level, where price found strong support and a tentative bottom in late July and early August. On a longer-term basis, the primary downside objective is at the 1000 psychological level. Upside resistance currently continues to reside around the key 1142 support/resistance level.