GOLD DOWNSWING

Amid surging expectations for a rate hike in December and rising comfort in the omnipotence of Central Banks, gold has once again found itself losing appeal.The global economy is in the throes of deflation and if the single largest economy decides on more hawkish policy moves in the coming months, appeal for precious metals and gold in particular will continue to fall.The recent slide in prices reflects a multitude of factors but is overwhelmingly supportive of further declines back towards levels last seen in 2009.With the catalysts for upside momentum notably absent at the moment, it’s down to the Federal Reserve and American economic figures to determine the directional bias of gold over the short-term and medium-term time horizons.

The Fundamental Picture

In spite of a weakening global economic backdrop, demand for gold bullion is surprisingly strong.On paper, gold prices continue to weaken after hawkish FOMC commentary combined with reasonable decent data stoked a rally in the US dollar.However, much of the strength in the dollar has less to do with optimistic expectations for the US economy and more to do with the worsening fundamentals of other advanced and developed economies.Many analysts are anticipating other global Central Banks such as the European Central Bank and Bank of Japan to take a more dovish approach to policy in coming months, choosing to expand quantitative easing and asset purchase measures in an effort to restore inflation. 

However, as the Europeans are learning and the Japanese have long known, these strategies have limited impact when it comes to stimulating inflation and preventing deflation.The ECB in particular has found the measure to be at exactly the same place as when it first announced the more extreme monetary policy measures.Nevertheless, this failure will not prevent Central Banks from continuing to experiment with other more nonconventional tactics as global trade rolls over.From the US perspective, the stronger dollar has dented the export economy for a considerable period of time and is unlikely to rebound in deference to the state of US monetary policy.While a stronger dollar is certainly not beneficial for certain parts of the economy, on the whole, the benefits outweigh the costs.This continued ascension and renewed emphasis on quality assets over yield will continue to see the dollar appreciate over time.

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