Gold Rally Snaps As Risk Tolerance Rises – Is 1338 Possible?

Gold retreated early in the European session on Thursday. Investors took profits after the rally yesterday that lifted prices by nearly 1.5% on the day, and shifted their attention to riskier assets after the U.S. Federal Reserve kept interest rates unchanged.

Fed Insists on A Rate Hike In 2016

As expected by the majority of market participants, the Fed stood pat on the benchmark rate at the September meeting. The central bank decided to hold its target rate for overnight lending between banks in a range of 0.25 to 0.50%. The Fed stated that the decision did not reflect any lack of confidence in the U.S economy. Policymakers would like to witness more evidence of continued progress towards its goals, before deciding on the next steps.

In the current environment, one of two targets set by the central bank has been reached. The labour market has created an average of 182,000 jobs every month so far this year. Average hourly earnings and participation rate are rising. Nevertheless, inflation is still far below the Fed’s 2% goal. Considering recent disappointing economic data that reflected falling consumer consumption, and weaker activity in the manufacturing and service sectors, the Fed probably needs to leave the low-rate environment intact for some more time to support the economic recovery.

Nonetheless, the central bank also indicated a rate hike by the end of this year. Speaking at the FOMC Press Conference following the rate decision, Fed Chair Janet Yellen said U.S. growth was looking stronger and rate increases would be needed to keep the economy from overheating. According to the CME Group’s FedWatch Tool, traders are pricing in a nearly 60% possibility of a December rate increase.

Gold’s Upside Seems Limited Due To Fading Attractiveness

Gold rose sharply on the deferral of an interest rate hike. A softer dollar, which gold is traded in globally, makes the precious metal less expensive for investors holding other currencies. Low interest rates also boost gold’s appeal as it doesn’t offer a yield and incurs an opportunity cost to the investor for holding it. However, the upside seems limited. Gold’s main function of hedging against risks, is being overlooked as speculators jump into riskier but higher-yield assets such as stocks. Such assets seem to be benefitting from perceptions of a continuation of the low interest rate environment.

On the supply side

Gran Colombia Gold Corp. is forecast to halt production by Friday. A local mining collective, comprised in its majority by illegal miners, convened a strike in Segovia and Remedios, (in which the company’s Segovia Operations are located) and prevented mining activity. Gran Colombia Gold is continuing to produce gold from stockpiles. Still, the supply is limited and not expected to sustain operations into next week.

CEO Lombardo Paredes said that a stoppage could prevent Gran Colombia Gold from reaching a 2016 output target of 145,000 to 150,000 ounces.

Technical Analysis


Fig: GOLD H4 Technical Chart

Gold took off after moving sideways around the 1315 level since the start of this week. The precious metal has successfully breached through the 38.2% Fibonacci retracement at 1330.00. Previously, the strong rally sent the market into the overbought territory. Gold is re-gaining momentum after a slight retreat. Two MAs that have converged and are currently placed below the price action. Thus, the metal is expected to surge and reach the 50.0% level.

Trade suggestion

Buy Stop at 1334.00, Take profit at 1338.50, Stop loss at 1330.00

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