Gold price dropped below the crucial resistance-turned-support zone of $2,700 on Wednesday; erasing the gains it had made over the past three weeks.
Even though the US President is certain, the concerns about the country’s fiscal policy and debt have sustained the demand for safe havens. Fed Chair Powell noted in his speech that the growing deficit was a threat to America’s economy.
Gold drops after Trump’s US election victory
The gold price has increased by more than 30% in the last year. Eight of the ten most recent months have seen monthly gains. The rallying was more intense in recent months, with bullion reaching new record highs several times.
Gold’s demand for safe havens increased in response to ongoing conflicts in the Middle East and uncertainty over the US Presidential elections. Also, the debt of the US was a factor. Gold’s demand for hedging has decreased on one hand due to the certainty of the 47th President of the world’s leading economy.
The precious metal is expected to be supported by concerns about the sustainability of US debt, and the overall economic outlook. Investors expect higher government spending under the Trump administration that could increase debt-to GDP.
Trump also threatened, during his campaign, to increase trade tariffs significantly. His economic policy also includes lowering taxes and increasing fiscal deficit. These proposals are in direct conflict with the Fed’s goal of maintaining an average inflation rate of 2%.
If the president keeps his promises, it may lead to the Fed taking a more progressive approach in easing their monetary policies. One the one hand higher interest rates tends to put pressure on assets that don’t yield much, like gold. With the change in policy, however, increased safe-haven demand will continue to support gold prices in the short- to medium-term.
Fed Interest Rate Decision
The US Presidential elections were a major factor in the November meeting, which was overshadowed by the excitement generated at the Fed’s September meeting.
The central bank officials surprised the market by reducing interest rates 50 basis points in September. This was the first time they had done so in nearly four years. As inflation continued to fall, the Fed shifted its attention to the slowing of the labor market.
The financial markets already factored in the 25 basis point rate reduction in November, compared to the September surprise rate cut that drove gold prices past the previous resistance zone of 2,600. The markets did not miss Jerome Powell’s comments.
Powell acknowledged that the inflation data was “a little higher” than expected in his speech. Powell also noted that fiscal policy and the growing deficit are the major headwinds for the US economy.
He said, “The fiscal path of the federal government, fiscal policy is unsustainable…and we can see that you are at full employment, and this will continue. So it’s very important to deal with.” This is a serious threat to the economy.
The US dollar has retreated after Powell’s comments and the Fed’s interest rate decision. It had previously risen to a four-month high in response to Trump’s victory. The dollar index (which measures the value the greenback versus a basket six currencies) was $104.34 as of this writing, after retreating from an intraday peak of $105.44 in the previous session.
Gold becomes less expensive for foreign currency holders due to the decline of the US dollar. The benchmark 10-year Treasury rates have also fallen from their 4-month high reached on Wednesday. Gold prices tend to rise when US bond yields are lower, as gold thrives under low interest rate conditions.
Gold Price Forecast
On the daily chart, gold prices surged up to $2790 in early this month. However, they then experienced a sharp reversal following Trump’s victory. The price of gold has fallen below the lower edge of the rising wedge chart. This is one of the more popular bearish reversal signals in the market.
Gold is still above the Exponential Moving Avg. (EMA) of 50 and 100 days. The MACD and Relative Strength Index have created a bearish divergence. Gold will continue to fall as the sellers aim for $2,600, which is the main support.
This view will be invalidated if the price rises above the high for the year to date of $2,790. If the price moves above this level, it will indicate more gains. The next point of interest is at $3,000
This post Gold Price Forecast: What Next for the Falling XAU/USD This post may be updated as new information becomes available.
