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The Fed, the Dollar, and Gold

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In their first meeting since July, the Federal Reserve has indicated that there will be one more interest rate hike this year, which is scheduled for December. They also announced the date when they will begin to liquidate portions of their massive $4.5 trillion balance sheet. This will begin in October.

The Fed have laid out a schedule in which they will reduce their balance sheet by $10 billion per month and increase their asset liquidation by $10 billion per quarter. This will go on until the cap is reached at $50 billion per month. Aside from the start date, this timetable was already disclosed.

What is unknown, even now, is the net effect this liquidation will have on interest rates.

The announcement that there will, in fact, be another interest rate hike is highly supportive of the dollar. It is inversely extremely bearish for gold prices, as well as any commodity paired in dollars, such as all the precious metals and oil.

As of 3:30 EDT, spot gold is currently trading at $1299.30, down $11.40 on the day. According to the Kitco Gold Index (KGX), the clear majority of today’s decline is directly attributable to a strong U.S. dollar. The strong U.S. dollar accounted for $8.80 of today’s selloff, with the remaining $2.60 attributable to traders bidding down the precious yellow metal.

A Technical Look at this Recent Selloff

The real question becomes whether this recent strong decline in gold prices has caused major chart damage. Given that this last rally took gold prices to $1363 before declining, and currently gold futures prices are sitting roughly at $1304, you would think that this decline has caused major chart damage, negating any bullish model.

Simply put, that is not the case. The rally in gold that has been in play since July 10 of this year began at $1200 an ounce. The first leg of this rally concluded at $1280 per ounce. The correction that followed, although extremely shallow, took gold pricing back to $1260. From $1260, gold prices climbed over $100 during the last leg of this rally. As of today, after reaching an intraday low of $1300 per ounce, gold has declined 61.8% of this last leg.

Although this correction can be considered a deep correction, a 61.8% decline falls within acceptable parameters of a bullish model. So at least for now, the bullish model remains intact. 

However, any further decline which would move pricing below a 78% retracement would, in fact, be interpreted as major technical damage, negating the current bullish model.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer