Gold trading outlook: futures drop on strong dollar ahead of ISM gauge

Gold futures were lower during early trade in Europe today, as investors bet ISMs key reading on US factories will strengthen outlooks of a rate hike by the Fed, supporting the US dollar. The escalating conflict in Ukraine failed to offer significant support against the slide.

Gold futures for December delivery on the Comex in New York traded at $1 277.7 per troy ounce, down 0.75%, at 8:03 GMT. Prices ranged from $1 275.2 to $1 290.9 per troy ounce. The precious metal added ~0.5% last week.

Silver for September delivery stood for a 0.31% daily drop at $19.432 per troy ounce, December palladium was at $906.50, backing off from the $913.00 13-year high from Monday. October platinum was down 0.28% at $1 420.75.

Economic outlook

Gold’s big story has been the Fed easing monetary stimulus for the US economy recently. As the US central bank cuts back on the massive government spending and prepares to increase the benchmark interest rate, the US currency gains in value. On Monday the US Dollar Index reached a new 13-month high, as investors bet that more positive US data will reinforce speculation that the Fed will raise the lending rate earlier than previously expected.

Since gold, like most other commodities, is denominated in dollars, a stronger greenback increases the cost of gold to other currencies, lowering its investment appeal.

ISM will post its key manufacturing PMI reading today, set to log another month of massive expansion for the US factory sector, before ISM’s services gauge on Wednesday, also projected for a significant growth. Expectations of upbeat employment data, due later this week, further strengthens dollar bulls.

Elsewhere, the Eurozone posted downbeat manufacturing readings today, though the Bloc-wide figure was still above 50, meaning an expansion in the sector. More economic data on the Eurozone is due this week, before a crucial European Central Bank (ECB) interest rate decision on Thursday. Speculation has been mounting that the ECB will take action to halt the downward spiral seen in the making for the Eurozone, though analysts expect the measures will fall short of lowering the central lending rate.

A possible quantitative easing program is on the table, however, pressuring the euro lower. The euro has a very strong opposite correlation with the dollar, meaning that a weaker euro directly supports the dollar, and hence, pressures gold.

“As the U.S. economy continues to recover while other economies including Europe and China slow, global monetary policies will diverge,” Yang Xi, a Hangzhou, China-based analyst at Yongan Futures Co., said for Bloomberg. “While gold has been weighed down by the dollar, geopolitical safe-haven demand is supporting it in the background.”

Ukraine

The conflict in Ukraine saw hopes of a peaceful resolution dashed on Monday, after rare peace talks between rebels and authorities broke down without any agreement.

The meeting in Minsk, Belarus, failed to produce any result, though the rebels were seen as softening their demands, backing off from a complete independence claim and now seeking self-rule within a federative Ukraine. The level of autonomy, however, was seen as excessive by Kiev, as separatists demand to have complete security, judicial and economic control, including deepening of economic ties with Russia.

Meanwhile, government forces continued losing ground on Monday, as Kiev said Russia is now waging a “great war” with Ukraine.

Moscow has been widely accused of supplying rebels with hardware and personnel, as well as expertise. NATO has presented many satellite images showing Russian military vehicles moving in Ukraine, and Russian military servicemen have been captured in Ukraine on more than one occasion.

The Kremlin denies all accusations. It should be noted that in March this year, Russian President Putin also dismissed accusations that Moscow had sent troops to Crimea, only to later admit it was Russian soldiers who took over the peninsula.

Generally, investors turn to gold in times of economic or political risk, as gold is seen as a safe-haven, keeping its value well-supported when faced with speculation. Investors, however, now seem adamant in the face of the geopolitical risks in Ukraine, keeping haven bids limited and gold pressured.

Assets at the SPDR Gold Trust, the largest exchange-traded gold-backed fund, dropped to the lowest level in more than two months on Friday, signaling lower investor interest in the precious metal.

Technical support and resistance levels

According to Binary Tribune’s daily analysis, December gold’s central pivot point on the COMEX stands at $1 288.0. In case futures manage to breach the first resistance level at $1 291.9, the contract will probably continue up to test $1 296.4. In case the second key resistance is broken, the precious metal will likely attempt to advance to $1 300.3.

If the contract manages to breach the first key support at $1 283.5, it will probably continue to slide and test $1 279.6. With this second key support broken, the movement to the downside may extend to $1 275.1.