Gold Buckles Under Dollar Strength, Hawkish Fed Certainty

Gold continued to take a beating Thursday, falling below $1,190 an ounce to a 10-month low, extending a November-slide that has wiped almost 10% off its value.

And their could be more to come.

Generic gold futures for delivery in February fell as as low as $1,184.3 Thursday, their lowest point since February, as the near certainty of a Federal Reserve rate increase next month and the strong dollar weighed on gold prices.

"Gold's attempt to build a base above $1,200 was rudely interrupted," IG markets Chris Beauchamp noted Thursday. "With the price now below this key support we could see a move towards $1,100."

Stronger than expected economic data out of the U.S. Wednesday and record highs in the equity markets have both hurt gold, which is typically a haven against economic and market weakness.

Investors in gold have also been blindsided by the market's support for Trump's promise of a massive fiscal stimulus package, which has made an interest rate rise more likely in December. Notes from the Federal Reserve's most recent meeting, released on Wednesday, suggested that members recognized the case for a rate hike but were waiting on evidence of an uptick in inflation and hiring. Fed officials will meet on Dec. 13 and 14, with analysts claiming the chance of a rate increase is nearly 100%.

Brokers had tipped gold to rally in the event of a Trump victory in the Presidential election. HSBC earlier this month forecast prices beyond $1,500 an ounce if Trump won, based on the assumption that the Republican candidate's anti-free trade policies would rattle equity markets. That was turned on its head when the markets rallied after Trump confirmed plans to inject $1 trillion into repairing and building new roads, bridges and airports.

Trump's policies could yet prove supportive of gold in the long run if promised spending plans and tax cuts push the federal deficit sharply higher and drive up inflation, weakening the U.S. dollar. Because gold is valued in dollars a strong dollar tends to have a negative effect on gold prices.

The gold price retreat has sent the equities of gold mining companies sharply lower. Gold miners are effectively a leveraged bet on gold prices. Randgold (GOLD) has lost 20% over the past month, South Africa's Gold Fields (GFI) is down 30% and AngloGold Ashanti (AU) is down 24%.   
 
"While the equities are still generating significant free cash flow at $1,200/oz gold prices we can see the relatively unattractiveness of owning equities in a bearish gold price environment," Goldman Sachs noted Thursday.

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