Is Gold getting Cold?
Last week US unemployment unexpectedly fell to 10% from 10.2% with Nonfarm payrolls at -11,000 against market expectations of a -130,000 drop, investors reacted strongly to the news pushing the Dollar sharply higher against all currencies gaining around 3% against the Yen and 2% against the Euro. But the currency market was not the only market shaken by this Dollar gain, Gold which is considered by many as the only real currency and posses an important anchor for many portfolios was hammered vigorously by the latest Dollar strength, falling from its peak around 1,226$ an ounce to as low as 1,147$, close to a 6.5% decline in two days. Why was Gold pushed south so swiftly? Since Gold does not pay anything such as bonds or stock that can pay dividends and unlike other metals Gold does not have an underline industrial demand worth mentioning, Gold’s price is purely depended on interest rates and excess liquidity. Having low rates and excess liquidity drives Gold prices up, but if investors are expecting that to change Gold can be pushed down very rapidly in favor of more yielding assets. Last week investors’ reaction was linked to that very assumption, lower unemployment means a rate hike in the US is closer than previously anticipated and if a rate hike in the US is closer many central banks which so far have been timid to raise rates would feel more comfortable to do so. When rates will be higher it would be less attractive to hold the Yellow metal that pays virtually nothing.
So how should you roll the dice?
For the long term-Now after Gold price fell so steeply many ask themselves is it the end of Gold’s spectacular journey north, or just classic buy on dips case? For Gold journey north to end investors need to expect not a single rate hike that would still leave rates incredibly low but consecutive rate hikes on the horizon with Fed aiming to tight monetary conditions .For this to happened you need to look primarily for unemployment to fall constantly. Although the recent fall in US unemployment is very surprising and positive one cannot ignore the proximity to the Christmas season with many Christmas temporary hiring taking place ahead of the busy season. Another important factor for constant rate hikes is the US housing sector, the Fed is very sensitive to the health of the housing sector and although weak home prices would not deter the Fed from one to two rate hikes it is certainly a factor in a long strategic tightening with higher rates burdening on the fragile mortgage borrowings.
For the Short term– until the next unemployment rate will shed some more light on the unemployment trend Gold is expected to trade a bit nervously as investors will be carful of making a long term bet to each side, Thus it is advisable to wait for more clarity for long term bets, However short term trading is a different story. Nervousness and volatility is very favorable to short term trading and by trading with a short range and being carful of significant levels you can benefit from investors’ indecisiveness.
Technical Analysis
Gold/USD, Daily
Bullish Scenario-A fail to break the 1100 zone downwards would generate momentum to swing upwards to test the higher levels although a break above the record 1,226$ is not expected.
Target- 1188$
Bearish Scenario-A daily close below 1100$ would push the pair to regain momentum at lower support levels
Target-1069$
Daily Forex Market Analysis provided by eToro
Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.
