Gold falls on rate hike anticipation

Gold prices fell on Monday after a week of general downward drift as the markets braced for an expected rate hike by the US Federal Reserve.

Any interest rate rise and monetary tightening cycle in the US could potentially have a detrimental effect on gold due to a few reasons. The US dollar and gold generally have a substantial negative correlation due to the fact that gold is denominated in US dollars. If there is increased buying of the dollar as US interest rates rise, this negative correlation could translate into lower gold prices. Also, in higher interest rate environments, non-interest paying assets like gold tend to be less attractive, thereby weighing on demand and further pressuring the price of gold.

As it currently stands, the precious metal is not far above its new five-year low just below $1050 support that was recently established in early December. After that $1046 low was hit, a sharp pullback for the US dollar prompted a sudden surge in gold above the $1080 resistance mark. But that rally was short-lived, as prices quickly began reverting back down once again towards long-term lows.

Of course, gold prices have been in a general downtrend for at least the past four years, since the $1900-area highs in late 2011. The plunge since mid-October, however, has been especially brutal for many gold investors seeking a long-awaited bottom for the precious metal. It appears that that bottom may not yet have been hit.

With US interest rates widely expected to rise on Wednesday after the Fed concludes its two-day policy meeting, gold could be poised for further downside and new multi-year lows. With any breakdown below the noted $1050 support level, which would essentially confirm a continuation of the longstanding bearish trend, the next major downside targets are at the $1025 support level followed by the key $1000 psychological level.

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