Gold Prices Drop to New Reaction Lows on Dollar Strength

Gold prices declined in today’s session as the US dollar rallied in reaction to a round of strong economic data. The contract for February 2017 settlement on the COMEX division of the New York Mercantile Exchange fell to a new reaction low at $1,171.3 and established a new closing low at $1,173.9, a loss of 1.4% for the day.

In today’s session, the payroll services provider ADP reported 216,000 new jobs were added in the private sector during the month of November, the strongest addition since June. The data was much higher than the downwardly revised 119k (revised from 147k) reported in October and also well above the 165k analysts were expecting, according to a Thomson Reuters survey.

In addition, the November Chicago PMI index increased sharply to 57.6 from 50.6 the previous month. This was well above consensus expectations of an increase to 52.2 and the strongest reading since January 2015.

Also in today’s news, the October Personal Consumption Expenditure (PCE) price index increased 0.2%, the same increase recorded in September and August, with the annual increase strengthening to 1.4% from 1.2% previously. Excluding food and energy, there was a 0.1% increase in prices with the annual increase remaining at 1.7% for the third successive month.

Finally, US pending home sales rose 0.1% in October following a revised 1.4% gain the previous month, which was originally reported as a gain of 1.5%. The increase was slightly lower than expected with the annual increase at 1.8%.

The dollar has reacted to the overall positive tone of the reports with a move to the 101.55 level, a gain of more than a half a percent for the day. The dollar’s advance implies the recent corrective period has run its course and a breakout to new rally highs could be forthcoming over the near term. Ongoing high expectations for an interest rate increase at the December FOMC meeting has been supportive to the dollar, which is bearish for gold. In today’s trading, fed fund futures are pricing in a 98.6% probability of an interest rate increase at the mid-December meeting.

Gold had started off this week’s trading with a move to the upside. However, the advance resulted in no improvement to gold’s current weak technical condition, as the recently broken key level of support, at $1,210/$1,205 for the February contract, remained intact.

With today’s move to the downside, it appears gold prices are resuming their decline from the early November high. The current target is at the December 2015 low at $1,055.2 an ounce, the next clear level of support on the weekly chart.

On the upside, first resistance is at the $1,200 level. A failure of any near term bounce to clear the $1,200 level would underscore gold’s weak technical condition and leave the broader bias for the precious metal firmly to the downside.

In tomorrow’s trading, initial jobless claims are on the calendar, as is construction spending and the ISM manufacturing survey. October construction spending is projected to come in showing an increase of 0.6% following a decline of -0.4% in September. Regarding the ISM Index, economists expected the figure to rise slightly to 52.1 from 51.9 in October. The key data release this week in the US is nonfarm payrolls for November on Friday. This figure will be particularly important given the expectations for a rate hike in December. Consensus estimate is for an increase of 180K jobs. Today’s ADP Employment Change helped set a positive tone ahead of Friday’s BLS report.

December Gold Daily/Weekly Charts


Tracy L. Morganthall, CMT, has been a Technical Market Analyst for more than 20 years. She has experience analyzing and producing reports on equities, both domestic and international markets, as well as Forex and commodities. She attended Trenton State College in Trenton, New Jersey, earning a Bachelor's in Finance.