On Wednesday, the price of gold plunged below $1,200. What does it mean for the gold market?
Gold prices slid more than 2 percent to about $1,185 the day before yesterday, the lowest level since February. What caused this decline, presented in the chart below?
Chart 1: The price of gold on November 24, 2016.
Well, as usually, probably the appreciation of the greenback after upbeat U.S. data sent gold prices lower. The U.S. dollar jumped more than 1 percent against the Japanese yen, as Chart 2 shows.
Chart 2: The USD/JPY exchange rate from November 22 to November 24.
U.S. orders for durable goods were likely the trigger for that jump. Durable-goods orders jumped 4.8 percent in October, much more than the economists expected. However, the headline was heavily skewed by a 94 percent surge in nondefense aircraft orders. Excluding transportation, orders were up 1.0 percent. Nondefense capital goods soared 14.5 percent, but excluding civilian aircraft they only rose 0.4 percent. On an annual basis, new orders rose 2.1 percent, but core capital goods, i.e. nondefense capital goods excluding aircraft, actually plunged 4.1 percent, as one can see in the chart below.
Chart 3: New orders for durable goods (blue line) and new orders for core capital goods (green line), as a percent change from year ago, from 2011 to 2016.
Therefore, the underlying details in the report were much worse than the headline. But it did not prevent the plunge in the price of gold. Disappointing new home sales which dropped 1.9 percent in October were also shrugged off. It is a bad sign for the gold market, as the price of the shiny metal fails to response to positive data, but falls on negative news (of course, the adjectives refer to the gold market, not to the U.S. economy). The November FOMC minutes could have also contributed to the strengthening of the greenback and the decline in gold prices. Importantly, the price of the yellow metal fell below the key support at $1,200, which appears to be a bearish development (we discuss whether that is indeed the case in today’s Gold & Silver Trading Alert).
Summing up, the price of gold plunged to about $1,185 on a stronger U.S. dollar and triggered sell stops. The reason behind the drop was a stronger greenback due to new orders for durable goods being stronger-than-expected and the FOMC minutes hawkish enough to reaffirm markets about the upcoming interest rate hike in December. Hard times for gold bulls came again.
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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