Eyes on Long-Term Support for Gold as Markets See Increasing Chances of the Fed Raising Interest Rates by 1% Next Week

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(Kitco News) – Inflation is proving to be significantly more persistent than initially anticipated as falling energy prices provide little relief to consumers who continue to see a steep rise in housing and food costs.
The continuing threat of inflation is creating greater volatility in interest rate expectations as markets see potential for the Federal Reserve to be increasingly aggressive over the rest of the year. A more aggressive central bank could have a significant impact on gold, with prices hovering above a critical long-term support level.
Interest rate expectations have increased since Tuesday after markets were surprised by warmer-than-expected consumer price inflation which rose to 8.3% in August.
According to the CME FedWatch Tool, markets are now evaluating a greater than 30% probability that the Federal Reserve will raise interest rates by a full 1%. Last week, investors were still debating whether the US central bank would raise the Fed Funds rate by 50 or 75 basis points.
“The inflation data shows that the Fed is clearly far behind the curve, so there is a very good chance the Fed will move 1% next week to show the markets that it is taking inflation seriously,” he said. affirmed Colin Cieszynski, chief market strategist of SIA Gestione patrimonial. “The data shows that inflation is not just a rise in the prices of some commodities, but has become large-scale, which is the Fed’s biggest fear.”
Rising hawkish expectations don’t bode well for gold. The precious metal fell more than 1% to retest the support at $ 1,700 an ounce after higher-than-expected CPI numbers on Tuesday. December gold futures remain under pressure, last trading at $ 1,712.50 an ounce, down 0.28% from the day.
Analysts note that rising interest rate expectations could signal further weakness for gold as it hovers above the critical long-term support.
“The bulls need to defend $ 1,686.30 in October gold futures, which is the summer low. A dip below that level would severely damage the chart and trigger interruptions in selling to drive prices down significantly,” he said. Jim Wyckoff, Kitco.com Senior Technical Analyst.

Cieszynski said he is looking at support between $ 1,680 and $ 1,675. He added that if that support area breaks, there won’t be much to keep prices from dropping to $ 1,550 an ounce.

Many analysts have noted that a break below $ 1,675 would signal the end of the three-year bull market in gold.
Unfortunately, for gold investors, interest rate concerns go far beyond just one rate hike. Lukman Otunuga, market analysis manager at FXTM, said the markets practically priced a 75bp hike in November. At the same time, markets are seeing a terminal rate of 5% by March.

“This will only add to gold’s problems as the precious metal loses its luster in a high interest rate environment. Speaking of technical data, $ 1,700 remains a key interest level with the path of least resistance pointing to. south, “he said.
While the outlook for gold is bleak, some analysts have said that there are other factors that could come into play to support prices. Many economists have pointed to the growing risk of a sovereign debt crisis among emerging market countries as the US dollar remains at its 20-year high.

At the same time, some analysts have said that a 1% move could be interpreted as a panic move by the Federal Reserve, which would be good for gold as markets could lose confidence in the central bank.
Nicky Shiels, head of metals strategy at MKS, said gold could stay as low as $ 1,700 amid rising interest rates as investors are reluctant to let go of a major safe haven. He added that there are concerns that the Fed will continue to raise interest rates until something in the global economy breaks down.
Ole Hansen, commodity strategy manager at Saxo Bank, said he expects gold prices to hold $ 1,700; however, much depends on the United States, which holds close to a maximum of 20 years.
“A 1% increase next week would bring us closer to the economic advantage that could end up being positive for gold,” he said. “The dollar will likely remain strong and gold weak until something breaks on the economic front. Until then gold may struggle, but I remain a bull because I believe the market is wrong to assume that inflation will return. at 3% “.
Andrew Hunter, a senior US economist at Capital Economics, said in a report Wednesday that he still expects the Federal Reserve to raise interest rates by 75 basis points next week.
“The new FOMC projections are still likely to signal that the end of the tightening cycle is approaching and we still expect a steep drop in inflation to eventually convince officials to start cutting rates in the second half of next year.” , he has declared .
However, Capital Economics is not optimistic about gold prices this year as it expects interest rates to rise and a strong US dollar to push prices to $ 1,650 an ounce by the end of the year.
The UK research firm is slightly more optimistic about gold in the second half of 2023 as it sees interest rates falling.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee this accuracy. This article is for informational purposes only. It is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article disclaim any liability for loss and / or damage resulting from the use of this publication.


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