“Higher for Longer” Results in a Deep Decline in Gold Prices Breaking Below $1900

Since Monday gold has decreased by approximately $54 in value with two trading days remaining. Market participants are reacting to the extremely hawkish monetary policy of the Federal Reserve and its commitment to maintain and possibly increase the exceedingly high levels of interest rates with the intent of contracting the economy to a point in which consumer and corporate business spending slows to such a degree that it will bring inflation down to the Fed’s target of 2%.

Gold Futures Price Decline as Witnessed Over the Last Three Days

For the third consecutive day, gold futures have had a substantial price decline. More alarming is the fact that the dollar decline has magnified. Gold futures were fixed at approximately $1945 on Monday, but after factoring in a nine-dollar decline the most active futures contract closed at $1936. On Tuesday gold prices opened below Monday’s closing price opening at $1935, and accelerated the price decline giving up $16.80 to finally settle at $1919.80. Today gold opened at $1918.80 and broke below a key and psychological level at $1900. As of 5:23 PM EDT, gold futures lost $28.90 or 1.51% to its current price of $1890.90.

The hawkish monetary policy by the Federal Reserve has had an exceedingly strong bullish effect on both the dollar and yields on US treasuries. The dollar has taken flight gaining well over a full percent since last Friday. The dollar index opened just above 105 (105.085), and is currently fixed at 106.365 after trading to an intraday high today of 106.54.

The decline over the last three days is only a partial story of the recent demise in gold pricing. Gold declined by approximately 3.8% in September alone. According to many economists and analysts, the current belief is that gold’s traditional role as a haven asset has all but disappeared. In light of U.S. equities trading under immense pressure as witnessed in the Standard & Poor’s 500 which is on track to decline by 5% this month, gold has no longer filled the void in times of uncertainty. Investors seeking safety amidst the turmoil of US equities have turned to cash and US treasuries which are offering the highest fixed income in years.

The strong decline in gold prices has created major technical chart damage. Today’s $29 price decline in gold futures broke below the low of $1913 which occurred on Thursday, August 17. After gold hit $1913 it had a mild rally which took pricing up to $1980 which was followed by a strong price decline. Many analysts including myself assume that the decline was a correction from the rally. However, it became clear once gold broke below the 78.6% Fibonacci retracement at $1928 it no longer seemed like a simple correction.

When gold prices broke below $1913 today it presented evidence that the price correction from the highs of May when gold traded above $2000 an ounce had not concluded and was very much still in play. More evidence was given once gold broke below $1900 per ounce which is a key and critical psychological price point. On a technical basis, there is no support until $1885 which is the low that occurred on Monday, February 27.

Awaiting PCE Index: Federal Reserve’s Data Dilemma Ahead of November FOMC Meeting

On Friday the government will release the PCE (Personal Consumption Expenditures) index which will be a key component when the Federal Reserve convenes for the November FOMC meeting. Also, until Congress passes legislation to fund the government all but essential services will cease including reports from various government agencies such as the Labor Department and Bureau of Labor Statistics which would mean the Federal Reserve would not have the most recent data to base its monetary policy decisions on.

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Wishing you as always good trading,

Gary S. Wagner