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Strong US Dollar Hurts Gold Prices

Irrespective of surprise actions by the major central banks and the looming uncertainty over the futures of Greece and Ukraine, the Gold prices lost nearly 5% in the month of February as investors continue supporting the US Dollar expecting the only major central bank to hike interest rate in 2015.

The yellow metal registered nearly 8.5% gain during the month of January, mainly because of the surprise action by the SNB during mid-month meeting. However, improvement in US labor market details coupled with the positive comments from the FOMC members, during January-end and early February, provided strong support to the expectations concerning near-term interest rate hike by the Federal Reserve. Gold prices declined nearly 29% in the previous two years, posting the first consecutive annual decline since 1998.

Improvements into the US labor market details have been a pillar for most of the speculations concerning the interest rate hike by the Federal Reserve. Market players do support an increase in benchmark interest rate near the June 2015, also supported by some of the FOMC members, supporting the across the board strength of the US Dollar. The Euro continued its decline even after the ECB announced its much awaited Quantitative Easing as the economic numbers, like inflation and the growth details, continue linger the expectations and the Greece election signals an exit of the troubled nation from the Euro region. Recently, the anti-bailout party of Greece gained victory into the snap election and is discussing ways to avoid extension of existing bailout package that expires on Feb. 28. The talks between the Greece Finance Minister and the Troika (EU/ECB/IMF), to avoid the bailout and find the intermediate solution has gone null on early Wednesday as none of the parties are agreeing to anything. The talks would resume on Monday to have final solution of allowing Greece some intermediate relief to restore the troubled economy. However, should there be continued non-agreement between the parties before the Fed 28, the Greece will run out of funds to work properly and will again join the queue for bankruptcy. Moreover, speculations also mounted that the Greece may leave the regional currency on the non-agreement of their terms by the European leaders and that can become sharp negative for the Euro region currency and provide uncertainty into the market supporting the Gold prices.

Another factor that has fueled considerable worries into the market was Geo-Political tensions in the Ukraine. However, the recent meeting between the Russia, Ukraine, Germany and France provided positive solution as the ceasefire was agreed upon starting from February 15. Hence, with this news, market players may relieve of this geo-political tension and that can adversely affects the Gold prices.

On the demand side, the global gold demand for the year 2014 remained at 3924 tons, down by 4% on a yearly basis and testing the lowest level since 2009. The jewelry demand was down by 10% to 2153 tons while investment demand gained 2%% to 905 tons from the 885 tons in 2013. However, the demand from smaller investors, consisting requirements of bar and coins plunged 40%. Central bankers remained as strong buyers for gold amidst the uncertain global markets by adding 16% more gold into their reserves to 477.2 tons during the year 2014 as compared to 409.3 tons in 2013.

India and China, that accounts nearly 54% of the global gold jewelry demand, are flashing different signals as India hit a record 662.1 tons in 2014 with 19% gain in Q4 2014 while the Chinese jewelry demand declined by 33% to 623.5 tons as compared to the 2013. The demand front signals that the increment in US Dollar and rise into the other investment avenues snatched major part of the gold investment demand and a continuation of the same can become detrimental for the gold prices. Moreover, recent plunge in the Chinese demand is covered by jewelry demand from India but declines of larger magnitude, which is more expected considering recent weakness into the Chinese economic numbers, can provide considerable damages to the Gold prices.

To sum up, recent escalation in the turf between Russia and Ukraine, in addition to the stronger US Dollar, could prove to be a negative for the safe haven demand of the yellow metal. Should there be constant improvement in the US economic details, which has been hurt in recent days, speculations concerning earlier rate hike by the Federal Reserve gains momentum which together with the solution to Greece bailout package could result noticeable declines into the gold prices.

From the technical perspective, the yellow metal prices are currently resting on the strong support near $1223, encompassing 100-day SMA and the 23.6% Fibonacci Retracement of its May 2013 to November 2014 decline. On the extended decline, and a close below $1223, it can test $1180 support level with $1200 psychological support being intermediate rest. A close below $1180 can call for multiple supports, near $1150 & $1130, before plunging to $1100 and the $1080 support levels which mark near-term bottom of the gold prices.

Alternatively, a reversal from the current level is more likely to pullback the prices towards $1240 resistance level, breaking which the 38.2% Fibo., near $1270 and the psychological mark of $1300, also including the 20 month old descending trend-line, are likely to provide strong resistance to the yellow metal prices.

 

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Anil Panchal
Market Analyst
Admiral Markets

At any use of the analytical material taken from the site of company Admiral Markets, and the secondary publication on any other resources, the rights to intellectual property for a dealing center «Admiral Markets», the reference to the company site is obligatory.



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