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Gold loses luster but relief may be imminent

Since the long-term highs in July, gold prices have been falling precipitously, giving back much of the gains made during the first half of the year. This downward spiral accelerated after Donald Trump won the US presidential election in early November, which caused interest rate and inflation expectations to surge while simultaneously boosting the US dollar and equity markets.

The hastened plunge in gold for the past month has primarily been the result of a strengthening US dollar, rising interest rates expectations, and exceptionally low market volatility. The question now is whether the recently frenzied gold-selling has already priced-in the negatives and is done for the time being, or if the precious metal has much more to lose going forward.

The main risk conditions for gold on the immediate horizon continue to be the interest rate outlook, which also drives dollar-strength, as well as volatility in the equity markets. For the former, the key upcoming risk event is next Wednesday’s Federal Reserve rate decision. The Fed Fund futures market continues to see an exceptionally high likelihood – around 95% - of a rate hike next week.

While higher interest rates indeed place pressure on non-interest-bearing gold, these elevated rate hike expectations have been sustained for quite some time already. Therefore, further negative impact on gold from an actual Fed hike next week is likely to be limited.

However, what has a greater likelihood of hurting gold significantly further is if the Fed provides any hints on Wednesday of an accelerated pace of tightening next year due to increasing expectations of Trump-fueled inflation.

In the absence of such indications, the price of gold has reached down to a key consolidation zone around the $1170 level. Price has fluctuated around this zone since the beginning of the month. $1170 is a key support level in itself, but is also around the 61.8% Fibonacci retracement of this year’s bullish trend up to July. Therefore, if the strong current support is able to hold, there is a high potential for a relief rebound around this area. Of course, the overall sentiment and fundamentals for gold remain bearish. From a technical perspective, the recent “death cross” of the 50-day moving average below the 200-day moving average was a strong bearish indication. Within this bearish trend, however, gold has been oversold for quite some time and has been overdue for at least a relief bounce. In the event of such a bounce, the $1200 psychological area is the key upside level to watch, with any break above $1200 serving as a trigger level for a potentially larger rebound.

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