Gold slumped under the pressure of aggressive rate hike expectations as US dollar and Treasury interest rates rose. The precious metal fell nearly $40 from its daily highs on Thursday and hit two-year lows. On Friday, however, it recovered somewhat.
“Gold is at war with the US dollar”
cryptocoin.com As you follow, gold could not maintain the level of $ 1,700 at the beginning of this week. It retreated further and touched lows last seen in April 2020. Phil Streible, chief market strategist for Blue Line Futures, comments:
Gold is at war with the US dollar. It also expects another 75 basis point rate hike from the Federal Reserve. The precious metal’s move accelerated as it dropped below the $1,685 level. Moreover, it also triggered sales pauses.
“Investors are really worried about a hard landing”
According to the CME FedWatch Tool, there is a 78% chance for a 75bps increase and a 22% chance for a 100bps increase at next week’s September meeting. Phil Streible comments:
Above expectations for September, the Fed looks set to continue raising interest rates for the rest of the year. This puts pressure on gold. People preferred too much liquidity and went to cash. They’re really worried about a hard landing.
“Investors are more likely to liquidate their gold positions”
After a few key macro announcements this week, including warmer-than-expected inflation data and better-than-anticipated retail sales, markets are now pricing rate hikes at full throttle. Edward Moya, senior market analyst at OANDA, notes:
After digesting this week’s data, expectations that the Fed will be very aggressive in the next round of rate hikes come to the fore. Also, the market is getting more nervous that a policy mistake will lead to a serious session.
Moya states that in such an environment, investors are more likely to liquidate their gold positions than stocks. Gold fell to its lowest level in two years. Also, it broke temporary support. Therefore, Moya notes that the momentum selling was quite strong on Thursday.
What does it take for gold to see a significant recovery?
Especially the Fed’s surprise with an increase of 100 basis points is also on the agenda. In that case, further weakness in the gold market cannot be ruled out ahead of the Fed’s September meeting next Wednesday. However, most analysts are only predicting a 75 basis point increase.
For gold to see a significant recovery, the market needs to see a slowdown in interest rate hikes. Edward Moya sees this as possible in the next few months as economic data begins to deteriorate. He also adds that he will allow the Fed to take his foot off the pedal of monetary policy tightening. In this context, the analyst makes the following statement:
We need to see inflation fall. The Fed has a balancing act to worry about. It can’t raise rates to 5% or higher without feeling too much pain. The fear is that they will become overly aggressive. So the Fed will try to take a step back on this issue.
“Gold will perform stronger as Fed Pivot”
Is the Federal Reserve getting ready to return? What is unclear is the timing and speed with which the Fed will have to reverse rate hikes. Gold is a favorite asset for strategists at Société Générale before the Fed pivot. Strategists’ assessment is as follows:
The obvious question is: will the Fed stop raising interest rates? Answer: Almost certainly yes. We think the possibility of the Fed turning and reversing interest rate hikes is a possible scenario in the earliest second quarter of the year, when we expect core inflation to start falling below 4% already.
According to strategists, defensive assets such as gold are preferred to position for the Fed pivot, rather than buying US stocks, as they will outperform. There is a strong dollar, a lower oil price and the possibility of continued economic slowdown. Therefore, strategists predict that the earnings outlook for US stocks will likely worsen in the first half of 2023. From this point of view, strategists make the following predictions:
In the short term, gold will likely continue to suffer from higher real interest rates driven by further Fed rate hikes. We may consider increasing our gold risk even further. Because even our lowest estimate of $1,550 is not far from the current levels.
“Gold likely to suffer with a hawkish rise”
Gold slumped near its lowest level in more than two years. Yeap Jun Rong, a market strategist at IG, says:
Right now, gold seems to be trying to stabilize after heavy selling overnight. The bearish momentum will likely continue to push prices down until the FOMC meeting next week. The Fed is the likely outcome.
Matt Simpson, a senior market analyst at City Index, comments:
A 75 bps boost is all set. So what everyone wants to know is whether the Fed can sustain aggressive tightening as we enter 2023. Gold is likely to suffer with a hawkish rise.
“The rates have now risen again and are pushing gold down”
Daniel Pavilonis, senior market strategist at RJO Futures, comments on the developments in the market as follows:
Today, the biggest factor is returns. After all, they are quite strong after a little delay. This sale in September, October was really just on interest rate adjustments. Interest rates fell sharply. Now they have risen again and are pushing the gold down.
Jim Wyckoff, senior analyst at Kitco Metals, comments:
This week’s US dollar index (DXY) strengthened. Also, US Treasury yields were up. These, combined with warmer US inflation data, kept gold and silver buyers mostly on the sidelines.
