The odds are stacked against gold

Gold prices dipped to an eight-month low last week as a bout of panic selling hit the market. Prices touched $1,227/ounce and finally closed at $1,229.7, down 3 per cent. With the Fed’s interest rate hikes expected early next year, investors are moving out of low yielding physical assets. Platinum dropped 2.7 per cent to $1,371.6/ounce and silver slipped 2.7 per cent to end at $18.64/ounce.

The dollar continued its upmove. From 83.7, the dollar index, which measures the value of the greenback against six major currencies, rose to a high of 84.5 and closed at 84.24 on Friday.

In the US, the number of people applying for jobless benefits rose unexpectedly. At 3,15,000, the claims increased by 11,000 for the week against an expected 7,000. This, however, didn’t put off the dollar bulls. Friday’s data on retail sales, which showed that US consumer sentiment is upbeat, injected back the optimism. Retail and food sales increased 0.6 per cent in August from July. The US SPGR Gold Trust, the largest gold backed exchange traded fund in the world, however, saw some buying after weeks of sustained outflows. The fund’s holdings were reported at 788.4 tonnes, up from 785.72 tonnes in the previous week.

Cues to watch

The possibility of early rate hikes by the Fed and the strengthening dollar are pushing gold down. However, the imposition of fresh sanctions by the US and the EU on Russia has made the situation uncertain again. The outlook for gold, however, is seriously negative, given that consumer price inflation globally is set to drop with the US now all set to wind up its stimulus programme and crude oil prices already on a south-bound journey.

This week will be action-packed with key data releases in the US.

On Monday is the industrial production data. On Tuesday begins the Federal Open Market Committee’s two-day policy meet, which will end on September 17 with the press meet. Analysts expect the Fed to reduce its stimulus to $15 billion from the current $25 billion, and close it completely by October.

They also expect clues aboutwhen the rate hike will happen. On September 18 is the housing starts data and the usual weekly jobless claims number.

On the charts

A close below the support of $1,240 is a bearish signal for international gold. This week, gold prices may well target $1,200. If this is broken, then it can go to the lows seen in 2013. There is a descending triangle pattern forming in the chart from the high of $1,423 with the neckline at around $1,180/$1,190.

In the coming weeks, if this support is broken, gold may fall steeper.

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