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By Ilya Spivak and Michael Boutros, Currency Strategists for & &

Gold Selloff to Accelerate on Firming Fed Rate Hike Bets

By Ilya Spivak and Michael Boutros, Currency Strategists
Gold prices produced a relatively tepid reaction after the Federal Reserve finally issued its first post-QE interest rate hike at the December
meeting of the rate-setting FOMC committee. Prices edged down toward 2015 lows but a big-splash breakdown was noticeably absent.
This seems to reflect the widespread expectation of the hike prior to its announcement traders were pricing in the probability of
liftoff at close to 80 percent weeks before the meeting as well as seasonal considerations. Indeed, traders apparent unwillingness to
rock the boat with just two weeks left in the calendar year made for muted responses across the asset class spectrum despite the historic
significance of the Feds rate increase.
This sanguine disposition seems unlikely to carry forward as the calendar turns to 2016. For all the dovish rhetoric surrounding the start
of the Feds tightening cycle, it is worth noting that policymakers maintained their outlook for next years policy path unchanged from
Septembers projection calling for 4 rate hikes in the coming 12 months even as they trimmed inflation bets. For their part, the
markets envision only two 25bps increases in the Fed Funds rate in 2016. This sets the stage for a surprise from Janet Yellen and
company, particularly considering the notably more hawkish makeup of the FOMC this time around.





actually delivers another hike

in the first quarter, the broadbased pickup in participation
and return of liquidity at the
start of the year ought to see
investors revisit Decembers
rate path projection and weigh
probabilities for a move in
March. US economic news-flow
has been broadly stable since



crude oil plunge recorded in

the second half of 2014 should finally begin to re-base out of year-on-year CPI calculations, pushing headline inflation closer to the core
rate (which is already at the Feds target of 2 percent). This may begin to fuel speculation that the central bank meant what it said and
could be gearing up to tighten faster than the consensus outlook envisions.
Gold prices continue to exhibit a strong relationship with Fed policy bets. Indeed, the projected 2016 policy path implied in Fed Funds
futures shows an impressive -0.92 inverse correlation with spot prices for the yellow metal (on rolling 60-day studies, see chart).
Needless to say, this is not surprising considering golds familiar appeal as an alternative store of value and go-to anti-fiat asset. If
markets begin to consider the possibility that stimulus withdrawal might proceed closer in line with FOMC projections versus standing
market expectations, gold prices are likely to face a swell in selling pressure.

Technicals: Gold Testing Support, Bearish Sub-1155

Back in September we warned of the risk for a near-term correction higher to test the 52-week moving average and indeed the following
weeks saw gold prices probe & fail to break above this threshold before turning over sharply. The subsequent decline is now testing a key
support zone heading into the close of the year at 1044/53. This region is defined by the 61.8% extension off the 2012 high, the 2010 low
and basic parallel support extending off the 2014 lows.
Since the late-2011 record high, gold prices have tended to make the yearly high in price within the first quarter of the year. Note that an
outside weekly-reversal candle took shape on the rebound off this key support with building divergence on the daily & weekly charts
suggesting that the short-side remains vulnerable near-term heading into the start of the year. Interim resistance stands at the July lowweek close at 1098 backed by the sliding parallel extending off the October high and the 1151/55 pivot region. A breach above this level
invalidates the broader short bias with such a scenario risking a rally back towards median-line resistance near 1200. Bottom line: well be
looking for a push higher in early 1Q for more favorable short entries with a break of the low targeting support objectives 1005, the
sliding parallel extending off the 2013 low and confluence Fibonacci support at 975/80.

Written by Ilya Spivak and Michael Boutros, Currency Strategists for

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