This article was written by Marius Paun who 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).
After consolidating for a few weeks, gold prices resumed their southward trajectory last Friday amid expectations that the Federal Reserve will raise interest rates for the first time since 2006, sending investors into the US dollar and in turn curbing demand for the precious metals.
Good News from China Increase Risk Appetites
Marius Paun, Senior Dealer, Citypoint Trading
However, a resilient manufacturing sector in China triggered a return in risk appetite on Monday pushing some market participants to cover their short positions. They were possibly concerned that most of the news is already priced in, and it was time to book part of the profits as a relief rally might follow. The short squeeze continued the next day and was supported by signs that housing and manufacturing sectors in the US could be losing some momentum.
This, however, has proved to be a ‘dead cat bounce’, and there may be a good chance to establish fresh short positions as once again gold prices seem to be heading south in anticipation of a looming US interest rates hike. The precious metal is down around 10% for this year and is on course for the third straight annual decline.
Gold-Backed ETPs at Six-Year Lows
Holdings in gold-backed Exchange -traded products (ETPs) slumped below 1490 tons, a record low since February 2009 according to data gathered by Bloomberg. Fed-fund futures now show that there is now an over 70 percent chance that the central bank will increase rates at its December 15-16 meeting, which should strengthen the greenback and in turn weaken the dollar-denominated gold even further.
Fed Chair Janet Yellen who addressed the Economic Club of Washington yesterday and the Joint Economic Committee of Congress on Thursday, already expressed her view that the future policy path will be data dependent. Furthermore, Chicago Fed President Charles Evans said earlier this week that he predicts the US interest rates to remain below 1% by the end of 2016.
Strong Economic Data from US Supports Greenback's Appeal
The ADP employment report released on Wednesday, indicated that the US added a five-month record number of workers, suggesting a possible good figure for the non-farm payrolls report due on Friday. Janet Yellen also expressed worries that keeping rates close to zero for too long could then force the Fed to tighten too quickly and the shock might disrupt global markets. It seems that investors interpreted Janet Yellen’s speech as a sign of confidence in the US economy and rushed into the US dollar.
In reaction, gold tumbled sharply and reached the weakest level in more than five years at $1046.44 an ounce in overnight trading. Although a pullback was underway on Thursday, the widespread consensus is for gold price to remain under pressure further in 2016.
