Fed's dream of rate cuts in December shattered? Gold's downward trend hard to stop as it approaches a critical threshold.

Written by: White55, Mars Finance

Gold prices continued to decline on Friday, with expectations for the Federal Reserve to hold steady at its December meeting strengthened by stronger-than-expected U.S. employment reports, and are set to close lower for the week.

As of the time of writing before Friday, spot gold fell nearly 1% during the day and once approached the $4000 mark, but has now rebounded.

Brian Lan, Managing Director of GoldSilver Central, stated: “Gold prices are currently consolidating, and we have seen a significant strength in the US dollar, which is driven by speculation over whether the Federal Reserve will continue to cut interest rates.” I believe the market is uncertain right now, especially as we approach the end of December, and we expect that many traders will take profits on their positions, which is what we have observed from last weekend to this week."

The US dollar index is expected to record its strongest weekly performance in over a month on Friday. The strengthening dollar makes gold priced in dollars more expensive for investors holding other currencies.

The report from the U.S. Department of Labor, delayed due to the federal government shutdown, shows that non-farm payrolls increased by 119,000 in September, more than double the estimated increase of 50,000.

Oscar Munoz, an analyst at TD Securities, stated in a report that this employment report “is favorable for all parties, allowing both hawks and doves to return to their respective camps.”

The minutes of the October FOMC meeting released on Thursday showed that many Federal Reserve officials prefer to keep interest rates unchanged. Chicago Fed President Goolsbee even reiterated on Thursday that he feels “uneasy” about a preemptive rate cut, especially considering that the progress towards the Fed's 2% inflation target appears to have stalled, and even started to move in the wrong direction.

Swap traders believe that the possibility of a rate cut next month is only 40%, whereas just two weeks ago, they supported a 25 basis point cut. Generally, when interest rates are high, the performance of precious metals tends to lag behind the market.

Despite falling back from historical highs, gold has still risen over 50% so far this year and is on track to achieve its best annual performance since 1979. The influx of funds into exchange-traded funds (ETFs) and gold purchases by central banks have supported this strong rally. However, the recent surge driven by the so-called “devaluation trade” (i.e., selling sovereign debt and currencies) may have been excessive.

Carsten Menke, head of research at Julius Baer Group, stated: “Recent depreciation trades are based on hope, not reality.” He said that while this phenomenon remains a long-term driver for gold prices amid increasing fiscal concerns in the G7 countries, some adjustments and consolidations make sense.

In addition, traders are also paying attention to geopolitical developments after Ukrainian President Zelensky agreed to implement the peace plan drafted by the United States and Russia.