Gold barely hangs on as Fed chatter increases

October 14, 2016

With the US Federal Reserve increasingly likely to raise interest rates by the end of the year, non-interest-bearing gold has been running scared as of late. Just as the US dollar should benefit from any Fed rate hike, gold should have a substantially negative reaction, as its non-yielding investment appeal diminishes in the midst of rising interest rates.

Wednesday’s minutes from September’s FOMC meeting showed that an unusually divided Fed still had concerns about jobs and inflation, but that it looks to be getting much closer to raising rates, especially in light of the fact that several key Fed members warned that further delays in raising rates could be risky, potentially leading the economy into recession.

While current and near-future risk conditions – US presidential elections, company earnings season, and crude oil prices, to name a few – could give gold a temporary boost, as the precious metal has typically been considered a safe haven asset, the specter of a Fed rate hike cycle is likely to overshadow or correct any such upside move for gold prices.

As chatter and speculation regarding the Fed’s intents have increased recently, gold has been plunging for the past two weeks. The latest culmination of this plunge has seen the price of gold settle just above major support around the $1250 level. Thursday’s initial drop in the equity markets helped boost gold modestly, but the effect was short-lived, as rebounding crude oil prices helped stock markets bounce back. Still in consolidation just above $1250 support, gold is at a critical juncture. With expectations of Fed action on the rise, gold could potentially have significantly further to fall. Any major breakdown below $1250 could follow-through towards the next key downside target at the $1200 psychological support level.

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