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(Kitco News) – Gold is trading near a 2.5-year low after an aggressive Federal Reserve boosted US dollar and Treasury yields. This macro environment is likely to push more people away from gold, creating a great buying opportunity, analysts said.
Volatility in the markets and a dramatic game in the foreign exchange market did not bypass gold either: this week, the precious metal fell by another 1.7%. After raising rates by 75 basis points for the third consecutive time, the Fed raised the funds rate to 4.4% by the end of 2022 and to 4.6% in 2023.
For the markets, this could mean another 75 bps gain in November and an additional 50 bps gain in December.
“We are seeing a significant uptick in market estimates of what the federal funds rate will do next year. This is a fairly large difference from a month earlier and is in line with the more aggressive Fed policy,” TD. This was stated in an interview with Kitco News by Bart Melek, Head of Commodity Strategy at Securities Global. “Real rates are rising. This is negative for gold. High transfer costs and high opportunity costs are likely to alienate capital.”
In addition, such militancy means that the peak of the US dollar is still far away, which is bad news for gold.
“It looks like this dollar rally has yet to peak. The current market environment is likely to remain worrying. Expectations for a Fed rate hike fluctuate wildly. We won’t see a decline until we see a decline in inflation,” Edward Moya, Senior Market Analyst, OANDA. told Kitko News. “The problem is that we do not see a rapid weakening of the economy. When we see that, then you will see the peak of the dollar. For gold, it all depends on when we see it.”
With the Dow hitting its lowest level of the year on Friday and more volatility ahead, gold is unlikely to see a strong rally in the short term. “We will not have a strong rush to buy gold yet. There are low volatility instruments that are currently giving you some returns. It takes away from the gold,” added Moya.
Eventually, gold will once again become a safe haven as the appetite for stocks wanes. But before that happens, the economy needs to slow down and inflation needs to slow down. “Once we start seeing inflation move to a more benign level, the Fed could change quickly. Since they have gone from dove to hawk, they may go the other way. But it is unlikely that in the near future,” Melek said.
The big risk for the precious metal is a drop below $1,600 an ounce. “If we break $1,600, then $1,540 will be the line in the sand where we start to see buyers emerge. Gold will benefit from safe-haven flows abroad,” Moya said.
Melek also sees gold falling below $1,600 an ounce as likely. “Volatility will be higher going forward. As volatility increases, margin calls increase. Long positions cannot be extended. We won’t see much re-entry of positions. Unfavorable environment for gold,” he described.
Gold is keeping an eye on the upcoming employment and inflation data for September. “The market is still looking at the very tough working conditions in the US and the implication is that wage pressures will continue to be a problem,” Melek said.
Market consensus calls for the US economy to create 300,000 jobs in September with an unemployment rate of 3.5%, close to a 50-year low.
On the positive side, gold at these levels is a great entry point for buyers.
“This makes physical gold cheaper. This is a buying opportunity. The Fed emphasizes that it has a dual mandate. And once inflation is brought under control, the Fed could turn around quickly in 2023. Real rates will be much more gold-friendly.” “I expect gold to do well in the long term,” Melek said.
However, for now, resistance is at $1,678-$80 and support is at $1,580 an ounce, he added.
Next week’s data
Tuesday: Fed Chairman Powell says US durable goods orders, CBR consumer confidence, new home sales
Wednesday: Expected home sales in the US
Thursday: US Jobless Claims, Q2 GDP
Friday: US household income and PCE price index, Michigan consumer sentiment
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