Gold Plummets On Demand Slump, FED Rate Hike Expectations

On Thursday, data from China showed that demand for the precious metal, in one of the largest consumer markets, is slipping slightly as investors’ appetite currently is turning towards the real estate market, in the lookout for high-yielding investment instruments that have higher potential for short-term gains.

As reported by the Hong Kong Census and Statistics Department, at the start of the second quarter of 2016, China’s total imports of gold from Hong Kong stood at 74.2 metric tons, down 2.8% from the previous month. This is the first decline in three months. The net purchases by the mainland from the offshore market, fell to 56 tons in April, compared with 64.1 tons in March. Imports from Switzerland also witnessed a drop to 14 tons in April, less than half the level from the month before.

Recently, gold prices have been burdened with the rate hike outlook in the US. After last week’s release of the April FOMC meeting minutes, the gold market has been slipping. The minutes hinted that an increase in US rates is likely to occur at the June or July meeting. Some key voting members of the FOMC have also expressed their hawkish views on US benchmark rates. The opportunity cost of holding gold increases, as interest rates rise, since the precious metal is not an interest-bearing asset and has a cost of storage/holding. Today, markets are tuning into FED President Yellen’s comments later in the day. The comments may provide some clarity on the next moves with regards to interest rates and overall monetary policy.

Yesterday, the US Commerce Department released data on the total orders for long-lasting goods in April. The data reported a jump of 3.4% in orders, in comparison with an increase of 1.9%, a month earlier. After stripping away transportation items, the so-called core durable goods orders rose by 0.4% last month.

In addition, jobless claims in the US dropped more than expected in the week ending May 20th. Data from the Department of Labor reported the number of people filling for jobless benefits stood at 268,000 last week. This is a fall of 10,000 compared with the previous reading. Jobless claims have now declined for three consecutive weeks, indicating that the US labor market is stable and improving.

The dollar index DXY today is hovering around the last close of 95.14, waiting for some clues from FED Chair Yellen. The improvement in recent data may allow Yellen to project a brighter outlook on the prospects of the next rate hike. And this may further dampen the value of the precious metal.

gold d1

Fig. GOLD D1 Technical Chart

GOLD has been under downward pressure after hitting a record high of 1303.47 on May 02, and is currently approaching a two-month low. ADX (14) is at a reading of 34.0465, implying that the current trend is pretty strong. Bear power is hinted, as DI- is far higher than DI+. The price is anticipated to test the support of 1197.17. The signal trend indicator formed a red arrow over the price chart two days ago, suggesting a short position for the near future.

Trade suggestion

Sell stop at 1215.06, Stop loss at 1226.46, Take profit at 1203.66

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