(Kitco News) – Gold is trading near 2.5-year lows after an aggressive Federal Reserve pushed US dollar and Treasury yields up. This macro environment is likely to drive more people away from gold, creating a great buying opportunity, according to analysts.
Market volatility and dramatic currency stocks have not left gold intact as the precious metal fell another 1.7% this week. After raising rates by 75 basis points for the third time in a row, the Fed raised the funds rate to 4.4% by the end of 2022 and to 4.6% in 2023.
For markets, this could translate into another 75 basis point increase in November and a further 50 basis point increase in December.
“We’ve seen significant increases in market estimates of what the federal funds rate will do in the next year. That’s a pretty big difference from a month ago and it’s in line with the Fed being more aggressive,” TD Bart Melek, lead Securities’ global commodity markets strategy, he told Kitco News. “Real rates are rising. This is bad for gold. The high cost of transportation and the high opportunity cost are likely to drive capital away.”
Furthermore, this kind of aggression means that the peak of the US dollar rally is still a long way off, which is bad news for gold.
“It looks like this dollar rally is not peaking. The current market environment is likely to remain unsettling. The Fed’s rate hike expectations are widely fluctuating. We won’t see that easing until we see inflation come down.” Edward Moya, OANDA’s senior market analyst told Kitco News. “The problem is, we don’t see the economy weakening quickly. When we do, that’s when you’ll see a spike in the dollar. For gold, that’s all when we see it.”
With the Dow hitting its low of the year on Friday and more volatility in sight, gold is unlikely to see a strong rally in the near term. “We won’t be in a strong rush to buy gold yet. There are low volatility instruments out there that are now giving you some return. This is taking gold away,” Moya added.
Eventually, gold will once again be a safe haven as the appetite for stocks wanes. But before that happens, the economy has to slow down and inflation has to slow down. “Once we start to see inflation moving towards a more favorable level, the Fed can change quickly. Going from accommodative to aggressive, they can go the other way. But it’s unlikely soon,” Melek pointed out.
The big risk for the precious metal is a drop below $ 1,600 an ounce. “If we break $ 1,600, then $ 1,540 would be the line in the sand where we will start to see buyers emerge. Gold will benefit from overseas safe haven flows,” Moya said.
Melek also sees gold falling below $ 1,600 an ounce as likely. “Volatility will be greater in the future. As volatility increases, margin calls will increase. Long positions cannot be extended. We will not see a large comeback of positions. Bad environment for gold,” he described.
Gold has been watching the upcoming employment and inflation data since September. “The market is still seeing very tight working conditions in the US and implies that wage pressures will continue to be a problem,” Melek said.
Market consensus requests seek the US economy to create 300,000 positions in September, with an unemployment rate at 3.5%, which is close to a 50-year low.
On a positive note, gold at these levels is a great entry point for buyers.
“This makes physical gold cheaper. It is a buying opportunity. The Fed stressed that it has a dual mandate. And as inflation is under control, the Fed may be ready to turn around in 2023. Rates will be much more conducive to gold. I expect gold to do well in the long run, “Melek said.
However, for now, resistance is at $ 1.678-80 and support is around the $ 1.580 an ounce level, he added.
The data for next week
Tuesday: Fed Chairman Powell Speak, US Durable Goods Orders, CB Consumer Confidence, New Home Sales
Wednesday: United States pending home sales
Thursday: Unemployment claims in the United States, Q2 GDP
Friday: US Personal Income and PCE Price Index, Michigan Consumer Sentiment
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