Gold plummets as dollar surges

October 5, 2016

Spot gold plunged sharply on Tuesday, by more than 3% at its worst, as the US dollar surged and more signals emerged that a Fed rate hike this year may be increasingly likely. Monday’s US manufacturing PMI data came out significantly better than expected, further helping to support an impending Fed rate hike, which would place significant pressure on non-interest-bearing gold. Other critical data releases this week will include the non-manufacturing PMI data that is due out on Wednesday, as well as the heavily-anticipated September jobs report on Friday.

On Tuesday, Richmond Fed President Jeffrey Lacker, a known hawk and currently non-voting member of the Fed’s policy committee, made some rather pointed remarks in favor of “preemptive action” against inflation by raising interest rates “not too gradually.” He also mentioned that he would have been a dissenting voter at the September FOMC meeting when rates were held steady, favoring instead to raise interest rates.

As a result of these rate hike signals and the resulting surge in the US dollar, the price of gold hit a low below $1270 that has not been seen since prior to June’s Brexit referendum. In the process of this plunge, a major psychological support level at $1300 was also swiftly broken down.

Gold has additionally been pressured by subsiding worries over the potential impact of Deutsche Bank’s troubles with the US Justice Department. Talk of a potential settlement between the German banking giant and the US government eased concerns, contributing to somewhat greater risk appetite in the markets and lower appeal for safe-havens like gold and the Japanese yen.

From a technical perspective, gold has certainly followed through on its previous breakdown last week below a key uptrend line that extends back from the $1050-area lows of late last year. Most recently, aside from breaking down below the $1300 psychological level on Tuesday, as mentioned, a notable breakdown below its 200-day moving average has also occurred. While the current move may have exhausted itself for the time being, and an oversold bounce may soon be due, the sentiment for gold has turned decidedly bearish. Of course, upcoming risk events could very well change this, but as it currently stands, the gold breakdown is eyeing further potential downside targets at the $1250 and $1200 support objectives.

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