Gold Down Sharply on Rate Hike Concerns

Today traders aggressively moved gold prices lower, resulting in the largest drawdown in a single day this year. As of 3 o’clock Eastern Standard Time, gold futures (April 2017 contract) are off by over $16 trading at $1233 80. Recent US dollar strength and a high probability of an interest rate hike in March are cited as primary catalysts for today’s sharp price decline.

The Fed and the Upcoming FOMC Meeting

Speaking at Harvard University’s John F. Kennedy School of Government yesterday, Fed Governor Lael Brainard said, “Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path” of rate rises. 

According to MarketWatch, these “comments by Fed Governor Lael Brainard on Wednesday helped to support the belief that the Federal Reserve is close to lifting benchmark interest rates when its policy-setting committee convenes March 14-15.”

MarketWatch also suggested that Brainerd’s statement, “followed hawkish comments from New York Fed Chief William Dudley and the San Francisco Fed’s John Williams earlier this week, sharply boosting market-based odds for a March interest rate hike.”

As of today, Fed-fund futures, which creates the market-based odds, is predicting a 78% probability that there will be an interest rate hike this month. Market sentiment for Fed-fund futures rose dramatically, up 12% over the last few days, as various members of the Fed went on record with hawkish statements.

A One-Two Combination

Gold prices moved sharply lower as bearish market sentiment combined with a stronger US dollar. Although bearish sentiment resulting from aggressive selling accounted for the majority of today’s lower pricing, the US dollar added insult to injury. Based upon the Kitco Gold Index (KGX), today’s $15.70 price decline was composed of a $5.60 drawdown due to a strong US dollar with the remaining $10.10 decline due to normal selling.

Technical Studies Indicate No Major Chart Damage

Based upon our technical studies, no major chart damage has occurred due to today’s sharp selloff. This most recent rally began at the end of last year at 1120, culminating on February 24, when prices reached 1263. A simple Fibonacci retracement of this move indicates that the 23% retracement is at 1230.

Today’s intraday low of 1231 was clearly above that price point. Our current levels of support are therefore 1230 (23% retracement) and 1210, which is a .382 % retracement. A move below $1210 per ounce would clearly indicate technical chart damage. However, up until that point, today’s price decline can still be viewed as a small correction contained within a much larger rally.

Wishing you as always, good trading,