Why Does Gold Decline Despite Terrorist Attacks In Brussels?

Thursday, March 24, 2016

goldYesterday, the price of gold decreased despite terrorist attacks in the heart of the European Union just a day before. What caused the decline and what does it mean for the gold market?

It Was Supposed to Be So Beautiful

It should have been a good week for gold. On Monday, existing-home sales dropped a 7.1 percent in February to an annual rate of 5.08 million units, the lowest level since November 2015 and much lower than expected. On Tuesday, terrorist launched coordinated attacks across Brussels, which initially spurred some safe-haven demand for gold, but by the end of the day the yellow metal had closed only fractionally higher. Yesterday, gold prices were seeing strong selling pressure. Gold futures ended New York trading at $1,219.6, a 2.6 percent decline from a day ago. We wrote yesterday that investors should not expect a boost in safe-haven demand for the yellow metal, but why did the price of gold decline?

Why Did Gold Prices Decline?

First, gold was under pressure from the greenback. The terrorist attacks occurred overseas and not in America. Therefore, we witnessed some flight to safety from Europe to the US In consequence, the greenback appreciated, while gold traded in dollars dropped. However, it cannot be the whole story, given that gold has recently been resilient to the US dollar.

Second, new home sales rebounded in February and rose 2 percent to an annual rate of 512,000 homes, theCommerce Department said Wednesday. The report means that after a weak start to the year, the U.S. housing market is showing some reliance. The publication came on the heels of Monday’s disappointing data on existing-home sales, and helped to change investors’ sentiment toward the US housing and the overall economy.

Third, some Fed officials were signaling recently that the April hike was becoming more likely. On Monday, Atlanta Fed President Dennis Lockhart said: “there is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for the end of April”. On the same day, San Francisco Fed President John Williams said that the U.S. economy was “looking great”. In consequence, he declared: “all else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates”. On Tuesday, Philadelphia Fed President Patrick Harker pointed out: “there is a strong case that we need to continue to raise rates”. He said that the Fed should consider another hike as soon as in April. And finally, St. Louis Fed President James Bullard said yesterday that there was a credible case for the Fed to hike interest rates in March. He also added: “we didn’t do it, so now we can look at April and see what the data look like when we get to April”. Surely, only Bullard is a voting member of the Fed policy committee this year, but it was enough to raise the probability of an April rate hike. According to the CME FedWatch tool, traders were pricing in a 13.9 percent chance of a hike in April on Wednesday, compared with just 6.9 percent a day ago.

Conclusions

Summing up, gold prices were seeing strong selling pressure yesterday. The yellow metal was pressured by the strong U.S. dollar, some positive economic data, and the hawkish tone embraced by several Federal Reserve officials. In consequence, the expectations of an April hike doubled. Surely, one could say that the April hike still remains unlikely. True, but it is now less unlikely than before. It means that investors are rethinking the likelihood of Fed hikes this year. The rising expectations of the path of Fed interest rates are negative for gold prices. There were also very important technical reasons for gold to decline (which we have discussed in the recent Gold & Silver Trading Alerts).

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium-term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Arkadiusz Sieroń is the author of Sunshine Profits’ monthly Gold Market Overview report, in which he keeps subscribers up-to-date regarding key fundamental developments affecting the gold market and helps them prepare for the major changes. Arkadiusz is a certified Investment Adviser, a long-time precious metals market enthusiast, and a Ph.D. candidate. He is also a Laureate of the 6th International Vernon Smith Prize.  You can reach Arkadiusz at Sunshine Profits’ contact page.