Gold Fundamental Forecast – December 15, 2016

Gold prices fell to their lowest levels in 10 months on Wednesday as traders reacted negatively to the Fed’s decision to raise its benchmark interest rate by 25-basis points and its forecast for possibly three more rate hikes in 2017.

The U.S. Dollar soared after the Fed’s decision and projections in reaction to rising Treasury yields. Since gold is dollar-denominated, the move made the precious metal more expensive for foreign buyers, leading to a forecast for lower demand.

While the rate hike was widely expected, it was the forecast for possibly three rate hikes that caught investors by surprise because the Fed had hinted in September that two raises were a possibility.

They also raised the forecast for future years to three hikes in both 2018 and 2019. The forecasts also indicated that number of hikes could increase even more once President-elect Donald Trump takes office.

Fed Chair Janet Yellen said that some Fed officials considered Trump’s economic proposals in their projections. “Some of the participants but not all of the participants did incorporate some assumptions of the change in fiscal policy into their projections,” she said. “That may have been a factor that was one of several that occasioned these shifts.”

Gold traders also reacted to rising Treasury yields. Since gold doesn’t pay interest, when rates rise, it becomes a less-desirable investment.

The 2-year Treasury yield, the most sensitive to Fed rate hikes, rose to 1.25 percent, its highest level since August 2009. The yield on the benchmark 10-year Treasury notes move above 2.5 percent, while the yield on the 30-year Treasury bond neared 3.15 percent.

In other news, U.S. Core Retail Sales came in under expectations at 0.2%. Retail Sales were up 0.1% versus a 0.3% estimate. Producer Prices rose 0.4%, higher than expected.

Capacity Utilization was 75.0%, in line with expectations. Industrial Production was down 0.4% and Business Inventories were down 0.2%.

Forecast

If traders continue to react to the Fed’s decisions then look for gold prices to continue to weaken. Remember that there is no major support until $1055.20 so we do have room to break. Aggressive bottom-pickers may slow down the price slide, but that price is the best downside target.

We could see a short-covering rally if Treasury yields stop going up or if stocks start to weaken, however, gold’s gains are likely to be limited.

Today, traders will get the opportunity to react to the latest U.S. Consumer Inflation data, the Philly Fed number and the weekly unemployment claims. Don’t expect too much of a reaction to these reports because of the Fed announcement overhang.