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Gold Plummets on Hawkish Fed Outlook- $1585 Now Key Support

Gold Plummets on Hawkish Fed Outlook- $1585 Now Key Support

Michael Boutros, Strategist
Gold_Plummets_on_Hawkish_Fed_Outlook_1585_Now_Key_Support_body_Picture_1.png, Gold Plummets on Hawkish Fed Outlook- $1585 Now Key Support

Gold Plummets on Hawkish Fed Outlook- $1585 Now Key Support

Fundamental Forecast for Gold: Bearish

Gold plummeted this week with the precious metal down by more than 3.6% to trade at $1606 at the close of trade in New York on Friday. The decline that we have warned about for some time in these weekly forecasts began early this week with bullion breaking back below the 200-day moving average before plunging through key support at $1626. Although in the near-term we may see gold recoup a small amount of this decline, the move does suggest a continuation of the broader bearish trend seen since the October highs at $1795.

Economic data out of the world’s largest economy continued to improve this week with weekly jobless claims, empire manufacturing, capacity utilization and the University of Michigan confidence survey all topping consensus estimates as equity markets continued to teeter at highs not seen in more than 5-years. Indeed this week we saw continued central bank rhetoric suggesting that the Fed may look to start normalizing policy as the recovery gathers pace. Philadelphia Fed President Charles Plosser certainly struck an improved outlook for the US economy, stating that the more broad-based recoverywould allow the central bank to scale back its asset purchase program, but warned that the highly accommodative policy stance ‘may risk un-anchoring longer-term inflation expectations’ as the rebound in private sector activity gathers pace. Even Chicago Fed Chief Charles Evans, a known dove and voting FOMC member this year, noted this week that the committee may be able to ‘turn off’ its easing cycle prior to achieving a 7 percent unemployment rate as discouraged workers return to the labor force. As US economic data continues to improve, the Fed is likely to begin discussions for a tentative exit strategy and expectations for the cessation of QE operations are likely to keep gold under pressure in the medium-term as inflationary concerns subside.

Looking ahead to next week, traders will be continuing to lend a keen ear to central bank rhetoric with a flurry of housing and inflation data likely to drive price action. January housing starts and building permits are released on Wednesday with consensus estimates calling for a slight uptick in permits as housing starts eased. CPI data on Thursday will be most pressing for gold with the street expecting a slight uptick in inflation for the month of January.

From a technical standpoint, the gold trade has continued to play out beautifully with price action continuing to trade within the confines of a well-defined descending channel formation dating back to the October highs. Key near-term support comes in at the confluence of the 138.2% Fibonacci extension taken from the October decline and channel support at $1585 with a break below this level eyeing subsequent support targets at $1575 and the 161.8% extension at $1555. Interim resistance now stands with former trendline support, currently around $1645, with only a daily close above the 200-day moving average at $1664 invalidating our near-term bias. Although in the near-term we may see prices pare a portion of this week’s decline, a weekly close above key long-term Fibonacci resistance at $1693 is necessary to deem gold as stable. Note that daily RSI has now cleared the 30-oversold threshold, thereby confirming the break of near-term support and offering conviction on our broader directional bias. -MB

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