Gold on the verge as investors price out Grexit risks

Not that the unfolding of the Greek crisis lent gold any noticeable support in recent weeks, but now that a bailout deal has been struck investors may move back into riskier assets such as equities which could see the precious metal fall further out of favour. Not only that, the dollar is also on the rise, which is even more bad news for some buck-denominated commodities. The US currency has been supported by expectations about the Federal Reserve becoming the first major central bank to hike interest rates. Not a long time ago, the Fed was expected to start raising rates in June. Then expectations were pushed out slightly for a September hike and then to December. But now the calls are growing to hold off until early 2016, most prominently from the IMF. The minutes from the FOMC’s last policy meeting, released last week, contained very little in the way of new information. However, as some FOMC members were concerned about the developments in China and Greece, the market’s interpretation of the minutes were that the Fed may indeed hold off until 2016. But now that risks of a Grexit have been reduced and the Chinese markets have been stabilised, the Fed may after all increase rates at the end of the year. In fact, the Fed Chair Janet Yellen has again said that she still expects “that it will be appropriate at some point later this year to take the first step to raise the federal-funds rate and thus begin normalizing monetary policy.” The prospects of rates rising slightly sooner than expected could potentially be good for the dollar and bad for gold. This week’s upcoming US data releases are therefore very important to watch for gold traders; good data should underpin the dollar and undermine the precious metal, and vice versa.

In the afternoon trading, gold did manage to bounce modestly off its earlier lows after dropping into an important area of support around $1150/5. This area marks the convergence of a bullish trend line with a couple of Fibonacci levels, namely the 61.8% retracement of the entire 2008-11 rally and the 127.2% extension of its June range. Though, as mentioned, it has bounced back a little here, this could be merely due to short-side profit-taking rather than bullish speculation. Unless the buyers really show their presence here, gold remains vulnerable for a sharp drop. Indeed, a closing break below $1150 could pave the way for a move to the 161.8% Fibonacci extension level of the aforementioned price swing. Thereafter, the next key level is at $1131/2 which corresponds with the November 2014 low. And if $1131/2 fails to offer support then things could turn really ugly for the beautiful metal.

But if $1150/5 continues to hold as support then gold may recover its poise and head back towards resistance at $1165 – a closing break above this level could potentially pave the way for the bearish trend line and the 50-day moving average around 1185.0.