(Kitco News) Gold has had a tough week as markets repriced rate hike expectations, and the strong U.S. dollar stole a lot of the safe-haven appeal away from gold. Next week, analysts remain cautious as the $1,700 an ounce level is a dangerous area for gold.
“Gold fell to an 11-month low as investors shunned the precious metal in favor of the USD amid the risk-off tone across markets,” said ANZ’s senior commodity strategist Daniel Hynes.
The precious metal is wrapping up the week down more than 2%, its fifth consecutive week of losses, which hasn’t happened in several years. Year-to-date, gold is down around 7%. At the time of writing, August Comex futures were trading at $1,702.50 an ounce.
The main trigger behind this week’s $40 selloff was the surprising U.S. inflation report, which showed annual price pressures rising 9.1% in June and led to the repricing of rate hike expectations for July.
Before the data was released, markets were looking for a 75-basis-point hike. However, after the inflation numbers, markets no longer ruled out an oversized 100-basis-point hike.
And this came after the Bank of Canada surprised the market with the 100-basis-point increase. “The increase of this magnitude is very unusual. Inflation is too high, and more people are worried that high inflation is here to stay,” Bank of Canada Governor Tiff Macklem told reporters Wednesday.
In response, the U.S. dollar index was trading at 20-year highs, yields rose, and gold tumbled and briefly traded below the $1,700 an ounce level.
“Investors concerned about the prospect of a global economic slowdown are shunning the asset, instead seeking shelter in the USD. Investors are cutting exposure to the precious metal,” Hynes described. “An increase in CPI could stiffen the resolve of the Fed to proceed with another big increase in interest rates later this month. Net long positions on the Comex have hit a three-year low while bullion-backed ETFs reduced their holdings by 29t last week.”
Whether it will be a 100-basis-point hike or a 75-basis-point hike, the Fed will demonstrate its commitment to fighting inflation at the July meeting, said TD Securities global head of commodity strategy Bart Melek. “Inflation will continue to be a problem, and it will necessitate the Fed to get tight, which is negative for gold,” Melek told Kitco News.
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And with June retail sales beating expectations in June, the Fed has room to tighten. “Interest rates may be higher than people think if the Fed remains truly committed to 2% inflation,” Melek noted.
However, the Fed will eventually have to pivot away from tightening too much. “And Gold will shine when they pivot the other way,” Melek added.
Why is the $1,700 area dangerous for gold?
Since it’s been so long since gold traded below $1,700 an ounce, there are not a lot of support levels right below it, which is why an even bigger selloff could be in store, according to analysts.
“Gold fell further than I had anticipated. For weeks a lot of us have been saying $1,700 was a possible level of support, which is where we are at it right now,” said Gainesville Coins precious metals expert Everett Millman. “The risk to the downside remains fairly high. It will take a bit longer for markets to fully digest the new Fed expectations and the higher dollar.”
There is a chance of gold to touch $1,600-$1,550 in the short term, but that doesn’t change Millman’s long-term outlook that gold is heading higher towards the year-end.
The last time gold traded below the $1,700 an ounce level was just before the pandemic hit. And now, it is in danger of the negative feedback loop taking prices there once again, Millman warned.
“As market expectation and narrative is repriced for stronger dollar this summer, this will affect the technical outlook. The negative feedback loop is when prices fall, more technical traders will be updating the ranges and getting less bullish on gold,” he told Kitco News.
The $1,700 is a critical spot for gold, and bargain hunters are buying the dip at the moment, said RJO Futures senior commodities broker Bob Haberkorn. “Gold will struggle in this environment,” Haberkorn told Kitco News. “100bps hike from the Fed is substantial from what we used to, and it will impact gold.”
Melek added that he is watching $1,679 as the first big support level and $1,818-$1,812 as resistance levels.
Yield curve inversion could help gold
One potential positive driver for gold going forward is the yield curve inversion, analysts added.
The U.S. saw its 10-year and 2-year Treasury yields invert, meaning that yields on two-year U.S. Treasuries are now higher than yields on the ten-year. In the past, this has pointed to an upcoming recession, which is what the markets are starting to price in more and more these days.
“The difference in yields is currently bigger than at any time in the last 22 years,” Commerzbank analysts said. “Gold should really benefit from this as a safe haven. This is one reason why we anticipate higher gold prices in the coming months and quarters.”
Data to watch
The focus will remain on the Fed’s rate hike expectations next week. But the Fed will be silent on the topic as it enters its blackout period on Saturday. This means there will be no additional insight from the Fed officials ahead of the July 27 meeting.
Tuesday: U.S. building permits and housing starts
Wednesday: U.S. existing home sales
Thursday: ECB rate decision, U.S. jobless claims, Philadelphia Fed manufacturing index
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