Depressed By Higher U.S. Rates And Fed’s Steeper Path of Tightening, Gold Plummets

Gold prices tumbled to the lowest level in ten months on Thursday after the Federal Reserve officials on Wednesday raised interest rates for the first time since last December and forecast a more aggressively economic tightening program for 2017.

Gold dropped more than 2.3% to hit the level not seen since early February 2016 at $1134.70 per ounce troy in Asian trading hours, extending its steep slide since the U.S. central bank lifted its target for overnight borrowing costs by 0.25 percentage point to a range of 0.5 percent to 0.75 percent. According to a statement following a two-day meeting in Washington, the Federal Open Market Committee cited “realized and expected labor market conditions and inflation” as reason for this time’s rate hike.

The Fed is widely believed to shift from easing monetary policy toward a tightening territory, as its two main goals which are inflation and labor are moving towards its target. While inflation expectations have increased “considerably”, the labor market is tightening. The central bank stated that it expects three rate increases in 2017, up from two in its September forecasts.

The dollar index soared 0.27% to 102.62 – the highest in the last 13 years, putting pressure on dollar-nominated assets such as bullion as a stronger greenback tends to cause gold more expensive for buyers holding other currencies. In addition, higher interest rates also make noninterest paying assets like gold less attractive.


Fig: GOLD D1 Technical Chart

Gold extends its downtrend following a spike to one-and-a-half-month high at 1337.16. Since then, the precious metal has plunged steeply and has broken below four key Fibonacci levels. Strong bearish has kept the market in the oversold zone for more than 1 month. Although the ADX index has been soaring, the downtrend seems limited. A pull back in near term is expected.

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