Why selloff in gold is not over: $1,600 danger zone for gold price

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(Kitco News) – Gold is trading near its 2.5-year low after an aggressive Federal Reserve pushed US dollar and government bond yields higher. This macro environment is likely to keep more people away from gold, creating a great buying opportunity, analysts say.

Market volatility and dramatic exchange rates affected gold as the precious metal fell a further 1.7% this week. After raising interest rates by 75 basis points for the third time in a row, the Fed raised its interest rate to 4.4% by the end of 2022 and to 4.6% in 2023.

For the markets, this could translate into another 75 basis point increase in November and an additional 50 basis points increase in December.

“We’ve seen significant increases in the markets’ estimates of what the Federal Funds rate will do over the next year. It’s quite a big difference from a month ago, and it’s in line with the Fed’s more aggressive stance,” TD Securities Global Head of Commodity Markets Strategy Bart Melek told Kitco News. “Real interest rates are rising. That’s negative for gold. High cost of carry and high opportunity cost are likely to drive capital away.”

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This kind of hawkishness also means that the peak in the US dollar’s rally is still a while away, which is bad news for gold.

“It looks like this dollar rally isn’t peaking. The current market environment is likely to remain troubling. Expectations for a Fed rate hike are fluctuating widely. We won’t see that easing until we see inflation fall,” senior market analyst Edward Moya of OANDA told Kitco News. “The problem is, we don’t see the economy weakening any time soon. If we do, you’ll see a spike in the dollar. For gold, it’s when we see that.”

With the Dow hitting its lowest level of the year on Friday and more volatility on the horizon, gold is unlikely to see a strong rally any time soon. “We won’t be in a big rush to buy gold just yet. There are low volatility instruments that are giving you some returns now. That’s taking gold away,” Moya added.

Gold will eventually become a safe haven again as the appetite for stocks wanes. But for that to happen, the economy must slow down and inflation must slow down. “Once we start to see inflation moving towards more benign levels, the Fed could turn quickly. When they went from moderate to hawkish, they could go the other way. But it’s unlikely to happen anytime soon,” noted Melek up.

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The big risk for the precious metal is a drop below $1,600 an ounce. “If we break $1,600, $1,540 would be the line where we start to see buyers appear. Gold will benefit from safe-haven flows overseas,” Moya said.

Melek also sees gold likely falling below $1,600 an ounce. “Volatility will be higher going forward. As volatility increases, margin calls will increase. Long positions cannot be extended. We will not see a major re-entry of positions. Difficult environment for gold,” he described.

Gold is keeping an eye on upcoming September employment and inflation data. “The market is still looking at very tight working conditions in the US and implies that wage pressures will remain an issue,” Melek said.

Market consensus calls for the US economy to create 300,000 jobs in September, with an unemployment rate of 3.5%, which is nearly its lowest point in 50 years.

On the upside, gold at these levels is a great entry point for buyers.

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“This makes physical gold cheaper. It’s a buying opportunity. The Fed has emphasized that they have a dual mandate. And if inflation comes under control, the Fed could quickly reverse in 2023. Real interest rates will be much friendlier to gold. expect gold to do well in the long run,” Melek said.

For now, however, the resistance is at $1,678-80, and the support is near the $1,580 an ounce level, he added.

Next week’s data

Tuesday: Fed Chair Powell speaks, US durable goods orders, CB consumer confidence, new home sales

Wednesday: US pending home sales

Thursday: US unemployment claims, GDP Q2

Friday: US Personal Income and PCE Price Index, Michigan Consumer Confidence

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; nor Kitco Metals Inc. neither the author can guarantee such accuracy. This article is for informational purposes only. It is not a request to exchange commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article assumes no liability for losses and/or damages arising out of the use of this publication.

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