Gold Prices Slip to 10-Month Low on Fed Rate Hike

Dec 15, 8:57 am
Gold prices

The price of spot gold fell 1.27% yesterday as the Federal Reserve hiked the short-term fed funds target rate to 0.75%. Although the broad consensus has been that the rate hikes were priced in, gold fell sharply on the day and was seen extending its declines to an 11-month low in early trading today. Gold prices were seen trading down to $1134.97 an ounce on early Thursday in the Asian trading session.

On a weekly basis, gold prices are now down for nearly six consecutive weeks in what is turning out to be one of the longest continuous losing streaks for the precious metal.

The declines were not just in the precious metal which runs opposite to the risk-heavy equity markets. By Wednesday’s close, the U.S. equities also closed in the red. The S&P500 index was down by 18 points, losing 0.81% on the day while the Nasdaq was down 14.62 points. The Dow Jones Index which was the talk of the town also paused in its rally, closing 118.68 points lower but remains within reach of the conquering the 20,000 key level.

Federal Reserve signals three rates hike in 2017

Fed officials said that the plan for three rate hikes in 2017, which was seen to be more hawkish than what the markets were anticipating. Rising expectations of interest rates saw gold prices extending the declines as the precious metal competes with rising borrowing costs and higher yielding assets.

Fed funds target rate: 0.75%, December 2016
Fed funds target rate: 0.75%, December 2016

Gold, which has been one of the top performing assets this year has been steadily declining, estimated to be off by over 17% from the highs in June/July.

The FOMC statement was seen to be upbeat with the economic assessment reflecting the recent string of positive economic data. Officials were confident on growth but not too optimistic. In the projections, Fed officials penciled in a growth rate close to 2.5%. The widely talked about fiscal policy was also discussed in the press conference with Fed Chair Janet Yellen noting that the supply side changes could be seen boosting growth and not be inflationary.

Gold prices could continue to maintain the range

On the technical outlook, the continued declines in gold prices now put the precious metal close to the $1110 – $1100 support level which was previously breached in December last year. However, the strong declines for the past 6-weeks could see the risk of a short squeeze in the near term. The psychological price level of $1200 is now likely to be tested to the upside for resistance which could potentially cap further gains. In the near term, gold prices are likely to remain range bound within the $1200 – $1100 region.

Gold - Weekly Chart. Mind the $1100 support and $1200 resistance
Gold – Weekly Chart. Mind the $1100 support and $1200 resistance

Of course, gold bugs will be more than likely expect to see a repeat of last year where gold prices rocketed after the Fed’s rate hike and maintained a bullish momentum into the first half of the year, making many to forecast gold prices to reach as much as $1400 an ounce.

While it is anyone’s guess as to how gold prices will behave hereafter, the monthly chart in gold shows a hidden bearish divergence as prices rallied to 1370 earlier this year.

Technical support at 1100 will be crucial as failure to hold out at this level could signal further declines especially if last year’s lows of 1046.44 will be breached. The Stochastics oscillator continues to remain in the oversold territory which highlights the risk of a short-term rally. While $1200 remains the key technical resistance, further gains cannot be ruled out as the gold price could be seen extending the gains to as much as $1250 thereafter.

On speculative positioning, the money continues to build to the short side of the market. This Friday’s CoT report on Gold will be important as traders will get more clues into how much more net short positions have been built up. A crowded trade here could potentially signal a breakout to the upside in the near term. However, with gold prices now close to the $1100 price level, it is best to stay on the sidelines to wait for selling opportunities near $1200 or to look for buying opportunities near $1100.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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