Bearish Trend in Gold Continues
The strengthening of the US dollar negatively affects gold prices. On the spot market, the price of gold has already fallen more than 8.5% year-to-date, and the decline in precious metal prices is stimulating demand for it. According to the World Gold Council report, global gold demand increased by 8% year-on-year to 1120.9 tons in the third quarter of this year due to higher sales of jewelry, coins, and bars, while exchange-traded funds (ETFs) experienced outflows, as well as reduced purchases by central banks and the technology sector.
Gold Price Decline Is Not Surprising
In the Federal Reserve’s monetary policy statement from October 28, it was clearly stated that the issue of raising interest rates would be considered at the meeting in December. This time, the slowdown in the growth of the world economy was not mentioned as a negative factor for the dynamics of the US economy, although this factor appeared in the September statement shortly after the collapse of global markets in August.
The Fed stated that they will monitor the situation and take into account the approaching maximum employment level and the target inflation rate of 2%—both real indicators and forecasts—when making decisions on interest rates. Despite the fact that inflation was below the target level for some time, unexpectedly positive October labor market data suggests a narrowing gap and an approach to the full employment level: the unemployment rate dropped to 5% from 5.1% in the previous month, and average hourly earnings for the month increased by 0.4%. Treasury bond yields also showed growth, causing the dollar to strengthen to a 10-year high amid increased likelihood of a rate hike in December.
Gold Forecast Depends on the Probability of Rate Hike
New macroeconomic statistics released since then have increased the probability of a rate hike in December: for the first time in three months, inflation rates became positive and reached 0.2% month-over-month in October, which matched expectations. Core inflation, excluding changes in volatile food and energy prices, rose by 1.9% year-on-year, also matching the forecast. Under conditions of a strong dollar, slowing economic growth in China, and eased monetary policy in the eurozone and Japan, further price increases will depend on the resilience of domestic demand in the US.
Will Gold Prices Continue to Fall?
The current US labor market situation is close to full employment, so rising wages will provide some stimulus for inflation growth, although not enough to reach the target of 2%. Then, the Central Bank will decide whether the current price growth dynamics provide sufficient grounds to believe that the target 2% will be achieved in the medium term. This scenario of events is quite likely to materialize.
According to CME Group FedWatch, based on the situation in the federal funds futures market, the probability of a Federal Reserve rate hike in December is currently estimated at 71.7%. We believe that the gold price will continue to fall to the next psychologically significant support level at $1000 per ounce, if no negative data emerge. For example, unexpectedly low revised GDP figures for the third quarter of the US, falling orders for durable goods, a decline in the services sector business activity index, or a weak labor market report would indicate weakness in the US economy and force the Fed to delay the decision on raising interest rates. In the case of such negative economic news, a correction is likely, which could lead to a pullback in gold to the highs of mid-October.
Online Market Discussion
- Forex Analysis and Comments vol. 7
Other December Forecasts
- Ruble Exchange Rate in 2016: Forecasts, Prospects, and Results
- Forex Wave Analysis for December: EUR/USD and GBP/USD – Prospects Are Not Important, USD/JPY – Buy Signals
- Speech by Mario Draghi: EUR/USD Rose, As Markets Did Not Expect Such a Surprise with QE
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“excerpt”: “Gold prices are expected to drop to $1000 per ounce in December due to the US dollar strength and the Fed’s potential rate hike.”,
“slug”: “gold-forecast-december-drop-1000-ounce”,
“short_description”: “Gold forecast for December favors bears with a high chance of hitting $1000 per ounce.”,
“faq_html”: “
FAQ
What factors affect gold prices in December?
Factors include the strength of the US dollar, the Federal Reserve’s potential interest rate hike, and global economic conditions.
Why is the US dollar affecting gold prices?
A stronger dollar makes gold more expensive for holders of other currencies, reducing demand and putting downward pressure on prices.
What is the outlook for gold prices in December?
The outlook is bearish, with gold prices expected to fall to $1000 per ounce if the Federal Reserve raises interest rates and economic data remains positive.
”
