Gold fell below $4,000 per ounce. XAU/USD dropped to $3,985, and this is the second decline in a row. The reason is US inflation data for October.
XAU/USD is the price of a troy ounce of gold in dollars. After the inflation report, exchange futures consider a Fed rate hike at the December meeting a done deal. Rate futures are contracts that show what the market expects from the Fed.
For a trader, this means two things at once: sharp moves in gold and a strong dollar.
What the decline looks like
The November 11 session closed the metal below the round level.
- $3,987 - session close, down about 1.1% for the day.
- Third session in a row with a new local low.
- 43 - the Relative Strength Index (RSI) on the daily chart.
Why a higher rate is expected
October statistics came in worse than forecasts.
- CPI +0.4% vs. September. The forecast was 0.3%.
- Core CPI +0.3%. Expected 0.2%, and this is the third month in a row at that pace. The core measure is calculated excluding food and fuel.
- 87% for a 25 basis point hike in December, according to CME FedWatch.
- 13% for a 50 point move at once. Before the report was released, this scenario was priced at zero.
CME FedWatch is an estimate of rate expectations derived from exchange futures.
What the Fed says
The regulator's rhetoric added pressure.
Austan Goolsbee, head of the Chicago Fed, called the report "on the edge of alarming" and stated that "we have a real problem with inflation."
- Christopher Waller, board member: with core inflation at 0.3%, he would have preferred a 50 point move.
- Lorie Logan, head of the Dallas Fed: allowed for a faster hike.
What this means for a trader
Money went into the dollar and government bonds.
- Almost 12 basis points - the rise in the yield on 10-year US Treasuries, to 5%.
- +0.67% to 102.90 - the DXY dollar index, intraday it rose to 102.96, a one-year high.
- USD/JPY approached 160.
DXY is the dollar's exchange rate against a basket of currencies.
The rate versus the metal. Gold doesn't pay interest, so 5% on risk-free government bonds directly takes buyers away from it.
What's next?
The reference points on the chart have diverged widely.
- $3,919 - the November 4 low, the nearest support.
- $3,879 - the yearly low from October 30.
- $4,050 and $4,100 - resistance above.
- $4,177 and $4,200 - the 50- and 100-day moving averages.
The next reason for movement is the US producer price index on Friday; the report time is in the economic calendar. For trading gold on days like this, it's worth choosing a challenge in advance.
Were you holding a long on gold below $4,000?
A break of a round level on statistics is exactly the situation where an account either works out or gets switched off. Gold has a wide daily range, and a single $60 move per ounce can easily eat up the daily loss limit if the volume wasn't sized to the program's rules. At prop firms, gold is sometimes a separate instrument with a leverage limit, sometimes in a shared limit with currencies, and a trade in the minute the data comes out counts as a violation somewhere. This can be read in the terms in advance, before paying for the evaluation. Friday's producer price report is already a reason to hurry.