Gold trading outlook: futures hover near 5-1/2-year lows as dollar strengthens

Gold fell early Thursday and hovered near the lowest since 2010 after the FOMC said the US economy continued to improve, spurring confidence for an interest rate hike that might come in as early as September.

Gold futures for delivery in December were down 0.81% at $1 084.4 per troy ounce at 06:58 GMT, shifting in a daily range of $1 098.2 – $1 081.5, not far off from Fridays 5-1/2-year trough of $1 073.7. The contract fell 0.3% on Wednesday and is currently down 0.2% for the week following five straight weekly declines, the longest such losing stretch since 2012.

Bearish sentiment continued to dominate the gold market, although downside movement seems to have stalled after the recent sell-off, as Federal Reserve policy makers said the job market has been improving, citing solid job gains and declining unemployment, fueling speculations that the first US rate hike since 2006 could come in as early as September.

Although the FOMCs after-meeting statement gave no definitive timetable, policy makers emphasized the US economy had overcome a weather-driven first-quarter economic contraction and was “expanding moderately”, sending the US dollar soaring against a basket of major trading peers.

The Committee introduced little changes to its language on the conditions needed to justify a hike, saying it needs to see “some” further improvement in the labor market, and that it must be “reasonably confident” inflation will reach its 2% medium-term goal. It added that policy decisions are “data dependent”, with focus falling on economic growth, employment figures and inflation.

An initial reading later on Thursday is expected to show that the US economy returned to growth in the second quarter and expanded by 2.6%, rebounding from a 0.2% contraction in the first three months of the year. A better-than-expected Q2 growth would bolster speculations for an increase in borrowing costs in September, analysts say.

However, whether the hike comes in September or December will make little difference for the battered gold market as investors have already largely positioned themselves in accordance, based on broad expectations for a single hike this year that would initiate a gradual tightening over the coming years.

Gold swung into a bearish market from a peak in 2012 after the Federal Reserve announced its intentions to phase out its Quantitative Easing program and paved the way for a lift-off in borrowing costs. The metal is headed for its worst monthly performance in two years, additionally pressured by weak physical demand in China and India and after it lost a source for safe-haven demand as Greece agreed to creditors reforms requirements in exchange for a third bailout.

And although there has been some increase in demand for gold coins in July reported by the US Mint and the Royal Canadian Mint, the slide is expected to continue, with Goldman Sachs projecting a drop below the key psychological level of $1 000. Data by the US Commodity Futures Trading Commission showed that speculators turned bearish on gold in the week ended July 21st for the first time since the government started tracking data in 2006, holding a net-short position of 11 345 contracts.

Global assets in gold-backed ETFs have been declining for three straight months to the lowest since 2009. Holdings in the SPDR Gold Trust, the biggest such ETF, were unchanged on Wednesday for a third day at 680.15 tons, the lowest since September 2008. Assets have shrunk by almost 50% since peaking in December 2012 at 1353.35 tons.

Pivot points

According to Binary Tribune’s daily analysis, December gold’s central pivot point on the Comex stands at $1 094.9. If the contract breaks its first resistance level at $1 099.9, next barrier will be at $1 106.6. In case the second key resistance is broken, the precious metal may attempt to advance to $1 111.6.

If the contract manages to breach the S1 level at $1 088.2, it will next see support at $1 083.2. With this second key support broken, movement to the downside may extend to $1 076.5.

In weekly terms, the central pivot point is at $1 097.8. The three key resistance levels are as follows: R1 – $1 122.0, R2 – $1 157.9, R3 – $1 182.1. The three key support levels are: S1 – $1 061.9, S2 – $1 037.7, S3 – $1 001.8.