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Gold Hits Death Cross as US Dollar, Rate Hikes Play Main Factors in 2018

June 27, 2018 at 15:35 by Andrew Moran

Gold futures are hovering near six-month lows midweek as the US dollar strengthens and the market anticipates further increases to interest rates. Moving forward, analysts expect the greenback and rate hikes to serve as the yellow metal’s nemesis for the remainder of the year.

August gold futures shed $1.70, or 0.13%, to $1,258.20 per ounce at 14:35 GMT on Wednesday. Gold is now poised to settle at its worst level since the middle of December, and it is on track for a monthly decline of 3.4%. So far this week, gold prices are down nearly 1%.

Silver, the sister commodity to gold, dipped $0.02, or 0.12%, to $16.23 an ounce. The white metal, which has fallen more than 5% year-to-date, is trading at a one-month low.

Despite the geopolitical turmoil occurring, the US dollar is not blinking as the greenback advanced 0.33% to 94.98. The currency, nearing 2018 highs, is poised for a monthly gain of roughly 1%. A strengthening buck is typically bad for commodities pegged in dollars because it makes it more expensive for foreign investors to acquire.

With the US economy expected to post positive jobs numbers and an impressive gross domestic product next month, the market anticipates it would be enough ammunition for the Federal Reserve to raise rates at least two more times this year. A rising-rate environment is generally bad for gold because it lifts the opportunity cost and sends investors into yield-bearing assets.

On Tuesday, Dallas Federal Reserve president Robert Kaplan said that the central bank could pull the trigger on two more rate hikes this year. That does not mean the Fed is no longer accommodative, he told reporters after a talk at the Hoover Institution.

The Fed is still accommodative, in my opinion, as we sit here today.

His Atlanta counterpart, Raphael Bostic, did rule out a fourth rate hike because of the current trade dispute with China. He revealed that he is concerned that trade tensions could weaken the national economy.

The disruption that comes from this type of trade war is not going to be good for the cost basis for businesses and it makes me a bit concerned how robust the economy will perform moving forward.

According to the CME Group FedWatch tool, there is a 71% chance of a boost to rates in September and another one in December.

These developments could be bad news for gold and silver during the rest of 2018, warn many analysts.

Gold continues to record fresh 2018 lows, even though global trade tensions are weighing on international markets. Does this mean gold has lost its safe-haven appeal, at least in the short-term? The latest movements in the US dollar and rising expectations of higher interest rates do suggest that there might be very little appetite for precious metals this year, especially if there are still some legs in this bull market for traders to take advantage of.

Earlier this week, gold’s 50-day moving average, $1,306.20, fell below the 200-day moving average, $1,307.20. This formed a technical pattern identified as a death cross, which is when the short-term movement dives beneath the long-term moving average. The last time this happened was in November 2016.

Overall demand for the yellow metal is also a concerning factor, says the World Gold Council (WGC).

The organization for the gold industry reported that gold demand in the first quarter of 2018 was the lowest it has been since 2008, totaling 973.5 tonnes. Researchers blamed the drop in investment demand for gold bars and gold-backed ETFs. Jewellery demand remained steady, while central banks increased their purchases 42% year-over-year. The total supply of gold advanced 3% as mine production inched higher at more than 770 tonnes.

In other metals markets, September copper futures were flat at $2.9935 a pound. September platinum futures plunged $16.20, or 1.85%, to $858.50 an ounce. September palladium futures slid $8.70, or 0.91%, to $946.00 per ounce.

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