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(Kitco News) – Gold is trading near a 2.5-year low after a hawkish Federal Reserve pushed the U.S. dollar and Treasury yields higher. This macro environment is likely to push more people away from gold, creating a great buying opportunity, analysts say.
Market volatility and dramatic currency plays have not spared gold, with the precious metal falling another 1.7% this week. After raising rates by 75 basis points for the third consecutive time, the Fed raised its key rate to 4.4% at the end of 2022 and to 4.6% in 2023.
For the markets, this could mean another 75 basis point hike in November and another 50 basis point hike in December.
“We’ve seen significant increases in market estimates of what the fed funds rate will do over the next year. That’s a pretty big difference from a month ago, and it’s consistent with the fact that the Fed is more aggressive,” TD Bart Melek, global head of commodity markets strategy for securities, told Kitco News. “Real rates are rising. That’s negative for gold. The high cost of carry and the high opportunity cost will likely scare capital away.”
Moreover, this kind of aggressiveness means that the peak of the US Dollar rally is still a long way off, which is bad news for gold.
“Looks like this dollar rally is not peaking. The current market environment will likely remain choppy. Fed rate hike expectations are swinging widely. We’re not going to see that subside until we won’t see inflation come down,” said Edward Moya, senior market analyst at OANDA. says Kitco News. “The problem is that we don’t see the economy weakening quickly. When we do, that’s when you’ll see a peak in the dollar. For gold, it’s all about when we see that.”
With the Dow Jones hitting a year low on Friday and more volatility to come, gold is unlikely to see a strong rally in the near term. “We won’t have a big rush to buy gold yet. There are low volatility instruments that now give you some yield. It takes gold out of it,” Moya added.
Eventually, gold will once again become a safe haven as appetite for equities wanes. But before that happens, the economy must slow down and inflation must decelerate. “Once we start to see inflation move to a more benign type level, the Fed can quickly turn around. Going from dovish to hawkish, it can go the other way. But it’s unlikely to soon,” Melek said.
The big risk for the precious metal is a drop below $1,600 per ounce. “If we break $1,600, then $1,540 would be the line in the sand where we start to see buyers emerge. Gold will benefit from safe haven flows overseas,” Moya said.
Melek also sees gold falling below $1,600 an ounce. “Volatility will be higher going forward. As volatility increases, margin calls increase. Long positions cannot be extended. We are not going to see a large inflow of positions. ‘gold,” he described.
Gold is watching for upcoming jobs and inflation data from September. “The market is still seeing very tight labor conditions in the United States and the implication that wage pressures will continue to be an issue,” Melek said.
Market consensus calls expect the US economy to have added 300,000 jobs in September, with the unemployment rate at 3.5%, near 50-year lows.
On a positive note, gold at these levels is a great entry point for buyers.
“It makes physical gold cheaper. It’s a buying opportunity. The Fed has emphasized that it has a dual mandate. And as inflation comes under control, the Fed could reverse quickly in 2023 Real rates will be much more supportive of gold. I expect gold to do well in the long term,” Melek said.
However, for now, resistance lies between $1,678 and $80 and support is around $1,580 per ounce, he added.
Next week’s data
Tuesday: Fed Chairman Powell speaks, US durable goods orders, CB consumer confidence, new home sales
Wednesday: U.S. home sales pending
Thursday: U.S. Unemployment Insurance Claims, Q2 GDP
Friday: US Personal Income and PCE Price Index, Michigan Consumer Sentiment
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