Gold futures are approaching a new five year low as the precious metal is hit by a double whammy. In addition, the U.S. dollar (USD) has strengthened in the expectation of a September interest rate hike which is drawing closer, placing additional downward pressure on the gold price.
A U.S. employment report from Automatic Data Processing suggested that the private sector added 185,000 jobs in July and while this is lower than the June figure, it still indicates that the U.S economy is in the recovery phase.
Another pointer to a revival of economic growth in the U.S. came from the Institute for Supply Management (ISM) which said on Wednesday that its services index rose significantly from the June reading of 56% to 60.3% for July. Business activity and new orders were both over 60% while the employment index went up by 6.9% to 59.6%. Any reading above 50% indicates economic growth while a reading under 50% would indicate a contraction in the economy.
With all these fundamentals dovetailing, the dollar strengthened further on Wednesday. The ICE U.S. Dollar Index (DXY, -0.09%) which measures the USD against six other major currencies was up 0.1% to 98.074. The index stood at 96.61 on 27 July and has been moving steadily upward since that date.
The inverse ratio that the U.S. dollar enjoys with all dollar-denominated commodity prices means that the stronger the dollar, the higher the price that the commodity becomes in other currencies which tends to push the commodity price downwards. The more than likely interest rate hike, which will strengthen the dollar further, should also make investment in U.S. instruments more attractive, simultaneously detracting from gold and thus placing further downward pressure on the precious yellow metal.
Ross Norman, CEO of Sharps Pixley Ltd in London, commented, “Gold is struggling to make significant headway against prevailing U.S. dollar strength and the all-important technical support and $1,080…..Gold is being dangerously drawn to the $1,080 level rather like a moth to a candle.”
Echoing the bearish sentiment, Fawad Razaqzada, analyst at Forex.com, issued a warning saying, “Indeed, if gold breaks below that key $1080 support, this could give rise to further follow-up technical selling which could eventually see gold drop towards the next logical support around $1000.”
MT4 Chart: Gold