Gold Just Dropped Below the 50-Day SMA, Whatís Next?

Witawat (Ed) Wijaranakula, Ph.D.
Wed Feb 11, 2015

The price of gold extended its losses another 1.4% on Wednesday to close at U.S. $1258.70 per ounce, just below its 50-day moving average, after the Bureau of Labor Statistics (BLS), a unit of the U.S. Department of Labor, said on Tuesday in their latest job openings and labor turnover survey, or JOLTS report, that U.S. job openings surged to more than 5 million in December.

Last week, the BLS also said that the labor force participation rate rose to 62.9%, from 58.8% a year ago, while the average hourly earnings growth rate is now 2.2% year-over-year.

The 10-year U.S. Treasury yield surged 1.76% to an intraday high of 2.025% on Wednesday. The markets are pricing in that the Federal Reserve may start raising interest rates in June as the U.S. economy is strengthening. 

One should be aware that the Federal Reserve is no longer using the consumer price index (CPI) as its official 2.0% inflation target and instead, has adopted the personal consumption expenditures (PCE) index, as it is more real-time economic data. 

The Bureau of Economic Analysis, U.S. Department of Commerce, reported last week that the headline PCE price index rate for December is 0.75% year-on-year, down from 1.15% the previous month. The Core PCE index printed at 1.33%, down from the previous month's 1.40%. It seems that it might take a while until the Fedís inflation target of 2.0% can be reached.

Nonetheless, the hedge funds sold gold, the euro and yen and bought U.S. dollars in anticipation of a Fed rate hike and more monetary easing ahead from the central banks around the world.

The U.S. Dollar index (DXY) surged on Wednesday to an intraday high of 95.115, near its 52-week high of 95.527. Gold is normally traded in an inverse correlation with the U.S. dollar, meaning gold prices decline with a strengthening U.S. dollar.

The gold price could get some temporary support from the popular gold-euro trade, as hedge funds may take short positions on the euro currency and make bullish gold bets. 

According the DailyFX, the net-short contracts on the euro currency printed at 196,300 during the week ending February 8, 2015, compared to 214,400 net-short contracts during the week ending June 5, 2012, which was the height of the Greek debt crisis.

From a technical viewpoint, the breakout in mid-January was a false breakout. One may want to pay close attention as the gold price just closed below the 50-day SMA. If the 100-day SMA canít hold, the gold price might retest U.S. $1180 per ounce. 

Here is what Goldman Sachs has to say about gold prices. The investment banker cut its gold price forecasts to US $1,089 per ounce for 2016 and US $1,050 per ounce for 2017, citing low inflation and higher interest rates in the U.S. as the key considerations behind the downward revisions.

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