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Gold remains vulnerable amid hawkish Fed, strong dollar, equity highs

  • Gold has climbed sharply since the beginning of the year as the US dollar has pulled back from its late-2016 highs and the US Federal Reserve has exercised characteristic restraint in raising interest rates further after the last rate hike in December.
  • The price of gold has risen by more than 10% within the past two months from its December base around the $1125 support level up to its recent 2017 year-to-date high just shy of $1245 last week.
  • In testimony to the US Senate Banking Committee on Tuesday, Federal Reserve Chair Janet Yellen struck a hawkish tone as she indicated relatively robust expectations that interest rate increases this year would be appropriate, and that it would be “unwise” to wait too long to raise rates. This hawkish-leaning stance helped boost the dollar further along its rebound and recovery of the past two weeks.
  • US equities have recently continued to surge to fresh record highs on a frequent basis, as earnings season has been more positive than expected overall and anticipation continues to run high that US President Donald Trump will be implementing sweeping pro-business tax reforms, regulation cuts, and other fiscal stimulus measures.
  • Amid the higher near-term likelihood of Fed monetary tightening, renewed strength in the US dollar, and a market environment characterized by strong risk appetite, the demand for gold could soon be pressured to break its year-to-date bullish trend.
  • Major resistance on the gold chart continues to stand firm to the upside around the $1250 level, which is not only a key psychological level, but also a well-tested support/resistance zone and the 50% retracement of the July-December 2016 downtrend.
  • If gold remains below this $1250 resistance, pressures on demand from the factors described above could prompt a significant downturn for the precious metal, with short-term downside price targets at the $1200 and $1150 support levels.

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