Gold Facing Additional Headwinds Ahead of Probable Fed Rate Hike

The reaction from the recent ISIS attacks in Paris initially sparked what seemed to be safe haven buying in gold

Marius Paun is the Senior Dealer at Citypoint Trading. Marius previously worked as a dealer for London Capital Group and on the Oil Desk at ODL Securities (now FXCM).

The reaction from the recent ISIS attacks in Paris initially sparked what seemed to be safe haven buying in gold on the early Monday morning session. However, the rally quickly ran out of steam, emphasizing the pattern displayed over recent times, which implies that any market reaction after a terrorist event appears to have a shorter and shorter effect on prices.

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Similarly, gold also reacts less to political uncertainty, social unrest and civil wars now that it appears to have become a prisoner of the Federal Reserve’s action (at least on the short-term) losing its traditional flight to safety allure.

As a consequence the downtrend, already firmly in place, resumed and as a consequence, bullion for immediate delivery slumped to $1064.50, the weakest level since early February 2010 (Bloomberg). The precious metal has lost about 10% this year, most of this loss occurring in the last 5 weeks, and is now heading for the third annual decline.

Traditionally, October is a bad time for gold and, as the chart indicates, the second half of October continued this trend, with gold giving back all the hard fought gains made during the summer. The moving averages also point south amid steady volumes. $1,100, which held as good support during September and October, was broken and can now be seen as a resistance level.

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Outflows, from exchange traded funds backed by gold, have surpassed $1.1 billion this month, the first decline since July. Holdings dropped to around 1,507 metric tons last week, the lowest level since March 2009 (according to Bloomberg).

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Marius Paun, Senior Dealer, Citypoint Trading

Meanwhile, the World Gold Council reports that demand for physical gold remains strong in India and China where a rise in the middle class population by a few hundred millions is likely to support jewellery purchases. Nonetheless, as gold demand shifts from West to East, futures contracts traded on Comex are still seen as the main driver in setting gold price. So, for that price to recover significantly, it’s crucial that buyers in the Western World rediscover their appetite. But investors seemed to be happy to continue buying US dollars, anticipating an imminent rate increase and bullion does not pay interest or dividends, which does not help in attracting suitors.

Minutes from the last FOMC meeting confirmed that most members agreed December’s interest rate hike conditions have been met. The US Labour market continued to improve as shown by the non-farm payrolls report, confidence is growing that inflation could reach the 2% target, US consumer price index rose 0.2% following higher rents and a rebound in health care costs.

With most of this already priced in, a bounce back above $1,082.00 is currently underway today. The consensus is gold could be due some short-term respite and one can argue that for the bear trend to remain ‘healthy’ and have enough power left to challenge $1,000.00 mark, a more meaningful rebound might be needed.

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