Prospects of a rate hike are taking the shine off of gold (GCM16.CMX).
Although the yellow metal had a small bounce on Thursday, it is still trading near seven-week lows as the market bets that the Federal Reserve will raise interest rates this summer. Higher rates are viewed as strengthening the dollar at the expense of hard assets such as gold.
According to the CME’s FedWatch tool, the market is now pricing in a 55% chance that the Federal Reserve will raise the fed funds rate at least a quarter of a percent by July.
“It's been a dramatic shift in the last week,” said Bill Baruch, chief market strategist at iiTrader. “Going into the previous Monday, there was roughly a 5% chance that the Fed would raise rates. This shifted from the FOMC minutes last Wednesday, and we've seen the gold sell off since.”
Gold traded as low as $1,217.25 per ounce on Wednesday, a far cry from last month when it traded as high as $1,303.60. Baruch expects it will get worse for the metal, saying the long positions by fund managers are “overextended.”
“I'm looking for it to drop huge over the next week,” he said. “On top of that, as we get into the fall, I expect to see volatility in the currencies due to the election, and I think that as well could help gold.”
Baruch sees a range between $1,228 and $1,230 per ounce to be a support level for bullion. Should gold fall significantly below that, his next target support level is between $1,205 and $1,208 per ounce.
“The market has not settled below that level since the February breakout,” he notes. “If we settle below there, we could see more selling ... If we break $1,190, all bets are off in the near term.”
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