Gold rally potentially topped out
James Chen, CMT January 31, 2018 12:24 PM
The primary driver of rallying gold prices since mid-December has clearly been a plunging US dollar. During the past month-and-a-half, the sharp rise in the price of gold from its mid-December low around $1236 up to its new long-term high around $1365 that was just reached last week, has tracked the equally sharp plunge for the US dollar index during the same period.
Strong bearish sentiment that has continued to weigh heavily on the US dollar has been a key market theme in recent weeks and months. This has helped to prop-up the dollar-denominated precious metal even in the relative absence of safe-haven demand, and despite the specter of rising interest rates that have the strong potential to diminish the appeal of non-yielding gold.
With US Treasury yields fluctuating around multi-year highs, and expectations that the Federal Reserve will likely raise interest rates at least three times this year, and possibly four, rising interest rates could be a factor that halts the gold rally in its tracks.
On Wednesday, markets were preparing for the highly anticipated Federal Reserve rate decision. Though no interest rate hike is expected at this time, market expectations ahead of the Fed meeting, the last one to be chaired by Janet Yellen before Jerome Powell takes the helm, have been leaning towards the hawkish side. Signs of a strengthening US economy, increased government spending, and rising inflation expectations have contributed to this hawkish anticipation. Even if the Fed turns out not to be as hawkish as expected, however, the stage has already been set for potentially steady interest rate increases going forward that will have a high likelihood of weighing on gold prices.
Since the noted long-term high around $1365 last week, gold has pulled back significantly, and is likely to continue doing so if interest rate expectations continue to remain elevated as indicated by bond yields and the Fed’s monetary policy outlook. In that event, a continued fall for gold prices should open a path back down towards the next key short-term target to the downside around the $1300 support level.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.