Gold Dips to $1360 as British Political Picture Stabilizes

Gold has started the week with losses, trading at a spot price of $1358.05 per ounce in North American trade.  In the UK, the Conservatives have chosen Home Secretary Theresa May to replace Prime Minister David Cameron. On the release front, it’s a very quiet start to the week. The sole US indicator on the schedule, the Labor Market Conditions Index, posted a decline of -1.9 points. As well, FOMC Esther George will speak at an event in Missouri.

Britain took an important step to restoring political stability on Monday, as Home Secretary Theresa May has won the race to replace David Cameron as Prime Minister. May remained the sole candidate for the Prime Minister position after Energy Secretary Andrea Leadsom withdrew from the race. May is expected to take over as British Prime Minister on Wednesday, when Cameron will resign. May was a strong supporter of the Remain camp, but she will now be mandated with presiding over Britain’s exit from the European Union, which could be a protracted and messy affair. The UK may have voted “Leave”, but there is no timetable as to when the exit will take place or what type of trade agreement will define the new economic relationship between the EU and Britain. The decision to choose a replacement for Cameron has stabilized the political picture, boosting the pound and pushing gold prices lower.

The Brexit vote to leave the EU has caused political and financial turmoil in Britain, and safe-haven gold as become a magnet for jittery investors. The metal touched $1375 last week, marking its highest level since March 2014. Gold has been one of the big winners of the Brexit referendum, as the financial markets bet on a Remain win and were completely caught off guard by the Brexit vote to leave the European Union. Gold has taken full advantage of the ensuing chaos, posting sharp gains of 8.8 percent in June and continued the upward movement in July. The instability and uncertainty surrounding Brexit means that gold prices could continue to climb, and well-respected UBS has stated that gold has started a bull run and will hit the $1400 level in the short term.

US employment numbers were generally positive on Friday, led by the key Nonfarm Employment Change report. The indicator surged to 287 thousand in June, crushing the estimate of 175 thousand. This followed a dismal reading of 37 thousand a month earlier. There was further encouraging news as the work participation rate improved, following two straight declines. At the same time, Average Hourly Earnings remains weak, as the wage growth indicator posted a weak gain of 0.1%, shy of the forecast of 0.2%. The unemployment rate rose to 4.9%, above the estimate of 4.8%. The employment picture remains bright, but weak wage growth continues to be the Achilles heel of the US labor market.

There were no surprises in the Federal Reserve minutes, which were released last week. In the June policy meeting, policymakers expressed concerns about a slowdown and hiring and the health of the US economy, and the underlying tone was one of prudence and caution. The June meeting took place just one week before the Brexit referendum vote, and in the minutes showed that Fed policymakers adopted a “wait and see” attitude about Brexit. The vote by Britain to leave the EU stunned the markets, causing turmoil in the markets and sending bond yields to record lows. The minutes indicated that Fed members projected two rate increases before the end of the year, but that forecast is likely out-of-date following the shock waves from the Brexit earthquake. Given the current economic climate, the markets are pessimistic about any rates moves before 2017. Investors have priced in no chance of a rate increase at the next Fed meeting on July 26-27, and just an eight percent chance of a hike in 2016. However, if US employment and inflation numbers improve in the second half of the year, the likelihood of a rate hike will certainly increase.

XAU/USD Fundamentals

Monday (July 11)

• 10:00 US FOMC Member Esther George Speaks
• 10:00 US Labor Market Conditions Index

*Key releases are highlighted in bold

*All release times are EDT

XAU/USD for Monday, July 11, 2016

XAU/USD July 11 at 13:25 EDT

Open: 1369.87 Low: 1350.69 High: 1371.35 Close: 1358.05

XAU/USD Technical

• XAU/USD posted losses in the Asian and European sessions. The pair has posted small gains in North American trade
• 1361 has switched to resistance following losses by XAU/USD in the Monday session. The line is currently a weak line.
• There is support at 1331
• Current range: 1331 to 1361

Further levels in both directions:

• Below: 1331, 1307, 1279 and 1255
• Above: 1361, 1388, 1416 and 1433

OANDA’s Open Positions Ratio

XAU/USD ratio is showing long positions with a majority (58%), indicative of trader bias towards XAU/USD reversing directions and moving to higher levels.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.