Rate Hike Expectations Weighing

The recent cascade in Gold has been fueled by a surge in US rate hike expectations ahead of the December FOMC. Expectations have given further support by the broadly positive November employment reports alongside a surge in Oil following OPEC’s successful agreement to activate production cuts.

The November employment reports showed the headline NFPs printing broadly in line with expectations at 178k vs. 180k expected whilst the Unemployment rate fell to its lowest level in nine years at 4.6%. This is the last set of data ahead of the December FOMC, and markets are taking it as an encouraging sign that the Fed will go ahead and raise rates.

Further underpinning Hawkish sentiment is the fact that President Trump is largely expected to succeed in delivering aggressive fiscal stimulus in the form of large tax cuts and increased infrastructure spending which has seen investors selling US treasuries and buying USD, weighing on Gold prices.

US Economy Nearing Full Employment

The market is reflecting the view that the US economy is nearing full employment whilst higher Oil and the pending Trump stimulus is likely to increase inflation and fuel a faster path of rate hikes from the Fed over the next year.

The current strengthening of the US Dollar increases the carry and opportunity costs for investors for holding zero-yielding assets such as Gold.News that China will tighten gold import quotas in a bid to curtail USD outflows has also exerted downside pressure on the precious metal.

The current environment of a steeper US yield curve, higher real yields, a stronger US Dollar and a subsequent lack of investor appetite could see Gold continue to trade lower into the New Year. However, a sustained downdraft to the January 2016 lows is unlikely unless the Fed becomes significantly more Hawkish.

Potential Supporting Factors For Gold

One of the stalling blocks that could weaken the current USD move is if the market comes to realize that President Trump will not have free reign to through both legislative channels to drastically lower taxes and reduce deficits, even with a GOP-controlled Congress. Furthermore, the implantation of Trump’s proposed infrastructure spending program might take much longer than most currently anticipate. Most of these projects are controlled at the state and local level and can have significant policy lags.Any mention of the threatened trade war between the US, China & Mexico could also put pressure on USD optimism.