Gold pressured as dollar and equities remain supported

As the US dollar found some new life on Thursday and US equity markets hovered right around their new all-time highs, gold extended its recent pullback well below the $1200 handle. Since late December, the price of gold had been in a sharp relief rally from its 10-month lows around $1125 support. That rally reached a high early this week near $1220 before embarking on the current 3-day pullback.

Going forward, gold should have plenty of potential opportunities to continue falling and resume the bearish trend that has been in place since July of 2016. The price of gold has been rising since the end of last year largely due to a sharp pullback in the dollar. Despite this dollar pullback, however, the fundamental outlook for the greenback remains supportive, as US interest rates are on track to rise at least gradually, but possibly at a more accelerated pace. In view of this outlook, gold is likely to be pressured further in the face of rising interest rates and a strong dollar.

The tentative pullback in gold this week has been driven in part by a bounce in the US dollar, but also by surging equity markets that have placed focus squarely back on risk assets over the perceived safety of gold. The Dow broke the long-awaited 20,000 mark on Wednesday, while the S&P 500 touched 2300 on Thursday. These market moves were driven in large part by actions from the brand-new Trump Administration in fulfilling key campaign promises. Although most of these actions were relatively uncomplicated executive orders dealing with mostly non-market-sensitive issues, the activity-filled first days of the new administration gave hope to investors that Trump’s pro-growth, pro-business economic agenda would also come to fruition.

The Federal Reserve holds its first policy meeting of 2017 next week on February 1st. Although the Fed is not expected to raise interest rates further at that meeting, the central bank is likely to provide a clearer outlook for rate hikes in 2017, especially in view of the projected US inflation trajectory under Trump’s proposed fiscal stimulus plans. With any more hawkish hints from the Fed, the dollar could continue to rebound and gold could continue to be pressured further.

From a technical price perspective, this week’s turn down from the noted $1220-area year-to-date high was also a turn down from the key 38% Fibonacci retracement of the downtrend from July to December of last year. If that $1220 area holds as resistance, a continuation of the bearish bias for gold could send the precious metal back down towards the noted $1125-area lows. Any further breakdown below that level would confirm a continuation of the entrenched downtrend, with the next longer-term downside target around the key $1050 support level.