Gold: Another year of Fed watching on tap

December 24, 2015

The traditional wisdom is that gold tends to fall when interest rates rise because higher interest rates tend to boost the US dollar (in which gold is denominated) and increase the appeal of alternative investments such as bonds. One week after the Federal Reserve embarked on its first rate hike cycle in nearly decade though, gold is not stubbornly refusing to follow the script.

The yellow metal did fall in the immediate aftermath of last week’s “hawkish hike” from the Fed, but the commodity managed to hold above its previous six-year low at 1050 before bouncing back on Friday. As of writing, gold is trading back around 1070, but the question now is where it goes next.

In the short-term, strong resistance still looms in the 1080-1100 corridor, where previous support levels have now turned into resistance and the declining 50-day MA comes in. Therefore, we wouldn’t be surprised if the metal simply consolidates in the 1050-1100 zone through the low liquidity holiday period.

On a longer-term basis, gold’s path will likely still depend on Federal Reserve policy: if the US central bank is able to raise interest rates in 2016 as aggressively as its most recent projections suggest (a total of four hikes next year, or one every other meeting), the opportunity cost of owning gold and likely strength in the dollar could easily push gold below 1000 or even 900.

On the other hand, many analysts project that the Federal Reserve will have to tap the brakes on its normalization schedule in response to weak global growth. If fears about low inflation or stalling economic growth only allow the Fed to raise interest rates once or twice in 2016, gold could be one of the biggest beneficiaries. In this case, bulls would want to see gold break back above 1100 early in the year, followed by an eventual move above previous resistance around 1090, which would break the string of lower lows and lower highs that has been in force since the 2011 peak above 1900.

One way or another, it looks like gold traders will be in for another year of scrutinizing central bank speak and constantly revising their projected path of interest rates in the US and abroad.  

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