Rate Hike Expectations Weighing
The recent cascade in Gold has been fuelled by a surge in US rate hike expectations ahead of the December FOMC. Expectations have been leant further support by the broadly positive November employment reports alongside a surge in Oil following OPEC’s successful agreement to activate production cuts.
The November employment reports showed the headline NFPs printing broadly in line with expectations at 178k vs. 180k expected whilst the Unemployment rate fell to its lowest level in nine years at 4.6%. This is the last set of data ahead of the December FOMC, and markets are taking it as an encouraging sign that the Fed will go ahead and raise rates.
Further underpinning Hawkish sentiment is the fact that President Trump is largely expected to succeed in delivering aggressive fiscal stimulus in the form of large tax cuts and increased infrastructure spending which has seen investors selling US treasuries and buying USD, weighing on Gold prices.
US Economy Nearing Full Employment
The market is reflecting the view that the US economy is nearing full employment whilst higher Oil and the pending Trump stimulus is likely to increase inflation and fuel a faster path of rate hikes from the Fed over the next year.
The current strengthening of the US Dollar increases the carry and opportunity costs for investors for holding zero-yielding assets such as Gold. News that China will tighten gold import quotas in a bid to curtail USD outflows has also exerted downside pressure on the precious metal.
The current environment of a steeper US yield curve, higher real yields, a stronger US Dollar and a subsequent lack of investor appetite could see Gold continue to trade lower into the New Year. However, a sustained downdraft to the January 2016 lows is unlikely unless the Fed becomes significantly more Hawkish.
Potential Supporting Factors For Gold
One of the stalling blocks that could weaken the current USD move is if the market comes to realize that President Trump will not have free reign to through both legislative channels to drastically lower taxes and reduce deficits, even with a GOP-controlled Congress. Furthermore, the implantation of Trump’s proposed infrastructure spending program might take much longer than most currently anticipate. Most of these projects are controlled at the state and local level and can have significant policy lags. Any mention of the threatened trade war between the US, China & Mexico could also put pressure on USD optimism.
The presence of significant global economic, political, market risks and the fact that the longer end of the yield curve and strong USD have already caused a tightening of conditions suggest that the Fed might opt for a Dovish hike in December. This would mean that rates and real rates along the curve may move lower which, alongside the resulting loss of USD upside could see technical traders taking gold back to $1,200 territory. It is also worth pointing out that momentum in the current long liquidation has run out of steam and could be reversed by such a move, strengthening support for Gold.
Furthermore, stronger Indian imports on the back of a healthy monsoon season and the possible increase in hoarding, following the government’s “demonetisation” policies could also support prices as China’s import quota reductions are partially offset.
The Technical Perspective
The technical picture for Gold is currently decidedly bearish. Having found resistance at the longer-term bearish trend line, the price has broken back inside the bearish channel running from 2013 highs price has now also fallen below local structural support at the May low of 1198. Both the broken structural and bearish trend line offer resistance. Bulls will be looking for price to get back above 1198 and hold, to alleviate bearish pressure.