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James Hyerczyk
Gold Bars and Dollar
Gold Bars and Dollar

Gold is trading lower early Thursday after a failing to follow-through to the upside on Wednesday following the previous session’s sharp rally. The market is currently testing $1200.00, which some traders are calling psychological support.

Two factors likely contributed to the market’s weakness on Wednesday. Firstly, an easing of tensions between Italy and the European Union encouraged investors to dump their safe-haven long positions. Secondly, a soaring U.S. Dollar pressured foreign demand for dollar-denominated gold.

At 0540 GMT, December Comex Gold futures are trading $1201.20, down $1.80 or -0.15%.

The U.S. Dollar was supported early in the session on Wednesday after the ADP National Employment Report showed private payrolls jumped by 230,000 jobs in September, posting its largest gain since February.

Shortly after the release of the jobs data, the greenback extended its gains after the Institute for Supply Management’s (ISM) non-manufacturing activity index jumped 3.1 points to 61.6 last month, the highest reading since August 1997.

Fed Chair Jerome Powell also made supportive comments. He added to the bullish tone for the U.S. Dollar when he said on Wednesday that the central bank may raise interest rates above an estimated “neutral” setting as the “remarkably positive” U.S. economy continues to grow.

In other news, tensions eased in Europe on Wednesday on reports that Italy plans to reduce its budget deficit over the next three years.

Forecast

The price action on Wednesday and today’s early weakness suggests that Tuesday’s sharp rise was fueled by aggressive short-covering. Furthermore, it suggests that hedge funds and money managers may have used the opportunity to add to their net short positions.

If downside momentum continues to increase under $1200 then look for sellers to go after last week’s low at $1184.30. The daily chart indicates the next support under this level is the August 16 main bottom at $1167.10.

Given the extremely bearish fundamentals and the series of lower tops on the chart, it seems the only true breakout to the upside in gold will be through $1220.70. Until then, bearish traders are likely to continue to sell rallies as long as U.S. interest rates are rising and the Fed is expected to turn more aggressive in its efforts to prevent the economy from overheating. That’s basically the gist of the message delivered by Fed Chair Powell on Wednesday.

While the long-term view remains bearish because of the hawkish Fed, gold does remain vulnerable to short-term upswings if the situation between Italy and the European Union escalates.

In the U.S. on Thursday, investors will get the opportunity to react to three more economic reports and a speech from a U.S. FOMC member.

The Challenger Job Cuts report is the first report. Last month it came in up 13.7 percent. Weekly Unemployment Claims are forecast at 214K, unchanged from last week. Factory orders are expected to rise 2.2 percent, up from 0.8 percent.

FOMC Member Randal Quarles is also scheduled to speak. Traders will be looking for commentary on monetary policy especially his opinion on inflation and the labor market. He may also offer his opinion on the pace of future interest rate hikes.

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