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Gold Records Six-Month Losing Streak - U.S. Dollar Continues To Weigh On Market

Kitco News

(Kitco News) - While the gold market is showing some resilience in the final trading day of September, analysts note that the market is remains stuck in a clear down trend as it notches its sixth consecutive monthly drop.

While off its lows, gold prices are preparing to end the week and month in negative territory. December gold futures last traded at $1,195.80 an ounce, down 0.50% from the previous week. For the month, gold prices are down nearly 1% from August

Since the downtrend started in mid-April gold prices have lost nearly 12%.

According to some analysts, gold is seeing its worst losing monthly losing streak in two decades; the renewed selling pressure came after the Federal Reserve maintained its optimistic outlook for the U.S. economy and signaled that it will continue to move forward with interest rate hikes through to 2020. The Fed’s outlook was also reaffirmed during the week as economic data showed the U.S. economy grew 4.2% in the second quarter.

While there were little surprises in Wednesday’s Federal Reserve monetary policy decision, currency analysts noted that the U.S. dollar continues to be the most attractive asset among developed nations.

“At the end of the day you can’t get away from the fact that the Federal Reserve is the only major central bank that is raising interest rates,” said Neil Mellor, senior currency strategist at Bank of New York Mellon.

Not only does the U.S. dollar remain strong, but Mellor noted that growing economic and geopolitical uncertainty, sparked by proposed major deficit spending in Italy is causing significant weakness in the euro.

“In this environment you still have to see value in the U.S. dollar,” he said.  

David Madden, market strategist at CMC Markets, said that he also sees further strength in the U.S. dollar, which will weigh on gold.

“I don’t see any shift in the U.S. dollar’s uptrend and I think we could see it retest its August highs,” he said. “As a result I think we have to expect that gold will retest its August lows.”

Not All Doom and Gloom for Gold

Although gold remains in a downtrend, some analysts see potential for the yellow metal as the market looks severely oversold.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that he sees some technical resilience in gold in the near-term as it looks like the market creates a higher low from August’s price action.

“Technically, I think gold is due for a bounce” he said. “All the metals look pretty washed out and there is a lot of negativity priced so we could see a bit of a relief rally.”

However, despite his short-term optimism, Cieszynski, said over the long-term, gold will struggle to break out of its current range as long as there is a strong bid in the U.S. dollar.

“I’m cautiously optimistic on gold with an emphasis on cautiously,” he said. “Gold is still in a sideways trend and even if you get a bounce the price will struggle to break through $1,210 an ounce as long as the U.S. dollar remains strong.”

Ole Hansen, head of commodity strategy at Saxo Bank, is also not ready to count gold market out.

He noted that although the yellow metal fell to a six-week low earlier this week, that softness wasn’t seen in other markets, particularly silver.

Gold’s sister metal is seeing significant strength as the price rallies more than 2% Friday. December silver futures last traded at $14.710 an ounce, up 2.5% from the previous week.

This is silver’s second consecutive week of gains and the market has ended a three-month downtrend.

“Gold’s weakness appears to be isolated so that could be an indication that there is underlying demand in the precious metals market,” he said.

However, Hansen said that gold still faces significant headwinds.

“If gold is going to have a chance, then the U.S. dollar and U.S. equities need to stop rallying,” he said. Investors don’t see the need to build a rainy-day fund as markets are pretty much behaving themselves.”

Rising Inflation Will Also Make Gold Attractive

In a recent interview with Kitco News, George Milling-Stanley, head of gold investments at State Street Global Advisors, said that rising inflation pressures is a critical factor that could help gold prices.

He explained that rising inflation will keep real U.S. interest rates in low to negative territory as the Federal Reserve indicated that it is no hurry to raise rates faster than it has already signaled.

While the latest economic data showed tame inflation pressures in August, markets will see another key indicator next week.

The major event next week will be Friday’s nonfarm payrolls report and economists will be eager to see if wages continue to rise after August average hourly earnings saw its biggest increase in nine years. Economists note that rising wages will continue to push inflation pressures and expectations higher.

Levels To Watch

Although gold fell to a six-week low, the market is still trapped in a range between critical support at August’s lows at $1,160 and resistance at $1,212 and then $1,236.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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