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Gold Plummets to Eight-Month Lows on Persistent USD - All Eyes on FOMC

Fundamental Forecast for Gold:Bearish

Gold prices are markedly lower this week with the precious metal off by more than 3% to trade at $1229 ahead of the New York close on Friday. The losses come amid continued strength in the greenback with the Dow Jones FXCM US Dollar Index pressing into fresh yearly highs not seen since August of 2013. While the broader outlook for gold remains weighted to the downside, near-term the metal is coming into support as investors shift their focus to next week’s key event risk from the Fed.

Easing geopolitical tensions in Ukraine, persistent strength in the dollar and improving US economic data has continued to weigh on demand for gold as prices fell to eight month lows this week. Looking ahead to next week, all eyes will be on the Federal Reserve on Wednesday with the August inflation numbers and the FOMC rate on tap. Should the policy statement cite a more upbeat assessment for growth and inflation, look for gold to remain under pressure as interest rate expectations keep a firm footing under the greenback. Such a scenario would likely see US Dollar denominated assets slide as US Treasury rates move higher.

On the other hand, should committee members cite skepticism or concerns over the recent miss seen in last week’s dismal non-farm payroll print, bullion could find some near-term demand/profit taking, with prices checking a key support barrier on Friday before retreating higher. As we’ve continued to note, the most significant possible supportive variable / risk to our outlook for gold “would be a more substantial sell-off in stocks or sudden escalations in geopolitical tensions both in Europe or the Middle East with such a scenario likely to fuel risk-off flows into the perceived safety of the yellow metal. That said, the technical picture remains rather bleak.”

From a technical standpoint, the outlook for gold remains weighted to the downside with our bearish invalidation level now brought down to 1258/60. A breach above this level shifts the focus back to the topside targeting key resistance at $1280/82 and the 200-day moving average at $1286. Near-term support rests at the 76.4% retracement taken from the late-December advance at $1229 with a break below targeting support objectives at $1206 and $1193. Note that the daily momentum signature has now dropped to its lowest levels since early June when the metal based around the $1243 with the drop into oversold territory this week suggesting that a larger decline off the July highs remain in focus. Look for Wednesday’s event risk to offer a catalyst with our broader bias favoring selling rallies sub $1260. -MB