By Gold price dropped below the crucial resistance-turned-support zone of $2,700 on Wednesday; erasing the gains it had made over the past three weeks.
Even with the certainty of the incumbent US president, concerns over the country’s debt and fiscal policy have continued to sustain the safe haven demand. In his speech, Fed Chair Powell also noted that the rising deficit is a threat to the country’s economy.
Gold falls after Trump wins the US election
Gold price has risen by over 30% year to date; recording monthly gains in eight out of the past ten months. Notably, the rallying has been steeper in recent months with the bullion hitting fresh record highs on several occasions.
In addition to the ongoing conflicts in the Middle East, uncertainties over the US presidential elections and the country’s debt prompted an increase in gold’s safe haven demand. On the one hand, certainty over the 47th president of the leading economy has eased gold’s hedging demand.
Nonetheless, concerns over the sustainability of the US debt and overall economic outlook are expected to continue supporting the precious metal. Under the Trump administration, investors forecast higher government spending that may increase the debt-to-GDP.
Besides, during his campaigns, Trump threatened to significantly increase trade tariffs. Other components of his economic policy include lowering taxes and increasing the fiscal deficit. Notably, these proposals crash with the Fed’s approach to maintain the average inflation rate at 2%.
If the president makes good on these promises, the Fed may result in taking a more gradual approach to ease their monetary policy. On the one hand, higher interest rates tend to exert pressure on non-yielding assets like gold. However, with the shift in policy, heightened safe haven demand is bound to continue supporting gold price in the short to medium term.
Fed interest rate decision
While the September Fed meeting yielded quite the buzz, November’s meeting was somewhat overtaken by the tightly contested US presidential elections.
In September, the central bank’s officials made a surprise interest rate cut of 50 basis points; the first reduction in close to four years. The move came as inflation continued to cool, prompting the Fed to shift its focus to the slowing labor market.
In comparison to the surprise rate cut in September that boosted gold price past the previously steady resistance zone of $2,600, the financial markets had already priced in November’s rate deduction by 25 basis points. That said, markets were keen on Fed Chair Jerome Powell’s remarks.
In his speech, Powell stated that he was “feeling good” about the US economy while acknowledging the inflation report that came in “a little higher than expected”. In the same breath, he noted that the increasing deficit and fiscal policy are the main headwinds to the US economy.
He stated, “The federal government’s fiscal path, fiscal policy, is on an unsustainable path…and we see that in a very large deficit, you’re at full employment and that’s expected to continue, so it’s important to be dealt with. It is ultimately a threat to the economy.”
In reaction to the Fed interest rate decision and Powell’s remarks, the US dollar retreated from the four-month high reached in reaction to Trump’s win. The dollar index, which measures the value of the greenback against a basket of six currencies, was at $104.34 at the time of writing after pulling back from an intraday high of $105.44 on the previous session.
A decline in the US dollar makes gold less expensive for holders of foreign currencies. Besides, the benchmark 10-year Treasury yields pulled back from the 4-month high hit on Wednesday. Lower US bond yields tend to boost gold prices as the latter thrives in a low interest rates setup.
Gold price forecast
The daily chart shows that the price of gold surged to a high of $2,790 earlier this month and then suffered a harsh reversal after Trump’s election. It has moved below the lower side of the rising wedge chart pattern. In most periods, this is one of the most popular bearish reversal signs in the market.
Gold has remained above the 50-day and 100-day Exponential Moving Averages (EMA). The Relative Strength Index (RSI) and the MACD have formed a bearish divergence pattern. Therefore, gold will likely continue falling, as sellers target the key support at $2,600.
This view will become invalid if the price moves above the year-to-date high of $2,790. A move above that level will point to more gains, with the next point to watch being at $3,000.
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