This article was written by Evdokia Pitsillidou, Risk Management Associate at easyMarkets.
The price of gold plunged this week, reaching its lowest level in four months as upbeat US economic data bolstered bets that the Federal Reserve will raise interest rates before year-end.
Spot gold, the price paid for immediate settlement, has plunged more than 6% in less than two weeks. As of early Friday morning, the metal was trading around $1,257.00 a troy ounce, the lowest since early June.
Bullion is now trading well below its 200-day moving average and is considered extremely overbought, according to the Relative Strength Index.
Gold Is Getting Crushed
The selloff hasn’t stopped at gold. In fact, silver’s decline has been much more severe when looked at in percentage terms. Since rebounding above $20 a troy ounce on September 22, the grey metal has plunged more than 13%. The spot price was last seen trading around $17.43 a troy ounce, the lowest since early June.
The familiar culprit behind the latest price collapse was the US dollar, a currency that often trades inversely with greenback-denominated assets such as gold and silver. The US dollar index, a measure of the dollar’s strength against a basket of six other major currencies, approached 97.00 early on Friday, reaching its highest level in two months. That represents a gain of about 1.6% over the past two weeks.
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Gains in the US dollar accelerated Thursday after the Labor Department said the number of Americans filing for first-time unemployment benefits declined unexpectedly in the latest week, reaching a nearly four-decade low. Jobless claims unexpectedly fell by 5,000 to a seasonally adjusted 249,000, marking the 83rd consecutive week that claims were below the key 300,000 threshold that’s normally associated with a firming jobs market.
Earlier in the week, the Institute for Supply Management (ISM) said the US services sector expanded in September at the fastest clip in nearly a year. The ISM non-manufacturing purchasing managers’ index (PMI) surged to 57.1 from 51.4 in August. Anything above 50 signifies expansion.
Federal Reserve Options
Upbeat economic data strengthens the case for the Fed to continue raising interest rates in the coming months. Investors also know that higher interest rates make the US dollar much more attractive, especially when compared non-yielding precious metals. By the end of Thursday, traders were pricing in a nearly 64% chance of a December rate hike, according to the 30-day Fed Fund futures prices.
The Fed has just two more meetings scheduled this year – one in November just before the presidential election and the final one December 13-14. The December meeting will be accompanied by a revised summary of economic projections. Based on the Fed’s September ‘dot plot’ chart, policymakers continue to expect one rate adjustment in 2016. In December of last year, policymakers had priced in four rate increases in the next 12 months.
Gold’s epic collapse could be a sign of things to come when the US central bank actually returns to normalizing monetary policy. Prior to the latest selloff, the big banks were becoming more bullish on the yellow metal, despite its repeated failure to break above $1,365.00 for any length of time. As the US economy accelerates further, gold could be one of the first to suffer in the financial world.