Gold Drifts Lower As September Rate Hike Expected To Come

Gold slumped for the seventh consecutive trading day, weighted down strongly by a strengthening U.S dollar and the prospect of an interest rate hike by the Federal Reserve this year. Still, investors remained bullish sentiment on the yellow metal as demand for physical gold is likely to rise in top gold importing countries.

Gold is heading for the longest run of decline since May after Federal Reserve chief Janet Yellen claimed that the case for increasing interest rate had been strengthened by recent economic data which showed labor market is moving towards full employment while inflation is on a rise. Yellen’s top deputy, Stanley Fischer not only hinted at a U.S. rate hike as soon as September 20-21, but also left the door open for another rate increase after that by the end of 2016.

Both comments from Fed’s top leaders were consistent with previous statements from other Fed officials and helped strengthen the dollar and erode demand for the precious metal as a safe haven asset. Since August 19, gold lost 2.8 percent to one-month low at $1,314.80 an ounce troy.

Reports from the U.S Bureau of Economic Analysis showed that Personal Consumption Expenditures (PCE) index increased 0.1% percent in July, in line with market’s forecast. Meanwhile, household spending has picked up 0.3% last month, extending the upbeat since the early spring. The focus this week will be on Friday’s U.S. non-farm payroll numbers, which is expected to show a strong reading again. An uptick in U.S NFP would inspire the speculation of higher rates and in return hurt no-yield bullion.

However, according to the U.S. Commodity Futures Trading Commission (CFTC) data published on Friday, investors were placing long positions on the metal. The latest CFTC’s COT report revealed that hedge funds and money managers increased their net long position in COMEX gold contracts in the week to Aug. 23, close to multi-year highs with 284,000 contracts.

On the demand side, as the mid-Autumn festival is coming close, China’s net gold imports via main conduit Hong Kong witnessed a 28.6 percent rise in July, as data from Hong Kong Census and Statistics Department showed. According to Swiss custom, Swiss gold shipments to China climbed to 22.5 tons in July from 18.5 tons in June. Surging local demand has boosted premiums in China to $3 an ounce to the global spot benchmark, compared with around $1.50 per ounce in the last couple of weeks. Premiums in Singapore also rose by 10 cents this week from about 50-60 cents last week.

In India, the second-biggest gold consumer, discounts were lowered to $25 an ounce, the lowest since the first week of June, and down from up to $52 last week as demand is slowly improving due to festivals and the wedding season in southern India. The three-month period ending in December often accounts for about a third of India’s gold sales since it includes the peak of the wedding season and festivals, when buying gold is considered auspicious.

On the supply side, taking advantage of prices hovering around two-year highs, Australia’s gold producers have increased output to 292 tons (9.38 million ounces) in the fiscal year ending in June. The total production surged to a 15-year high and was 2 per cent more than in the previous financial year.

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Fig: GOLD D1 technical chart

Gold is retreating back to the support at 1310.80. Since June 24, gold has test this support twice but failed to break below this level, as the bull lacked momentum. This time, the price has fallen below both the MA50 and MA20, with the RSI (14) having ticked down to 41.22 for the first time since early June. The metal is forecast to dip further and move forwards the 23.6% retracement at 1297.74.

Trade suggestion

Sell Stop at 1319.50, Take profit at 1310.80, Stop loss at 1323.50

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