Gold hit a three-week low on Wednesday as US dollar and Treasury yields strengthened. The Federal Reserve’s commitment to further tighten monetary policy also clouded bullion’s outlook. Analysts interpret the market and share their forecasts.
“Gold locked in overall downtrend for now”
Spot gold fell 0.8% to $1,639.40 at the time of writing. Thus, the yellow metal hit its lowest level since September 28. U.S. gold futures were down 0.6% at $1,646.60. Meanwhile, the dollar index (DXY) rose 0.4%. This hurt gold’s attractiveness for offshore buyers. Also, benchmark US 10-year Treasury yields approached the 14-year high they touched last week. Yeap Jun Rong, IG market strategist, comments:
Market participants can wait for the Fed to put an end to rate hikes more clearly before they regain some confidence in gold. Monetary tightening is not over yet, given the upside risks to inflation. This will keep gold prices locked in an overall downtrend for now. Also, gold will run the risk of being sold at the end of any rally.
“Without physical demand, gold is likely open to sharp declines”
cryptocoin.com Minneapolis Fed Chairman Neel Kashkari said on Tuesday that the Fed may need to raise its benchmark policy rate above 4.75% if core inflation does not stop rising. The market expects the Fed to raise 75 bps for the fourth consecutive year in November.
Gold is generally accepted as a hedge against inflation. High interest rates increase the opportunity cost of holding the asset because it does not pay interest. In a note, Standard Chartered underlines:
Gold needs to find physical market support before Diwali given seasonal demand. If physical demand fails to pacify the downside in October, gold will likely find itself vulnerable to sharp declines in the coming weeks.
“Primary catalyst for gold, Fed rate hike cycle”
Edward Moya, senior analyst at OANDA, commented on the developments:
There is relief in yields. Also, the dollar rally has definitely hit a big hurdle. Gold, to say the least, has not seen the selling pressure return. So, it’s gaining some stability. But in the end, the primary catalyst for gold will be the Fed’s rate hike cycle.
Meanwhile, Russia’s central bank vice-president Alexei Zabotkin said on Tuesday that further increases in gold and foreign exchange reserves are not appropriate for now, as it will accelerate growth in the money supply.
“The US dollar index remains the determinant of daily price, according to the main finding of gold and silver traders,” said Jim Wyckoff, senior analyst at Kitco Metals.
“The path of least resistance for yellow metal is south”
Lukman Otunuga, head of market analysis at FXTM, says the path of least resistance for gold is in the “south”, with expectations of Federal Reserve rate hikes and rising Treasury yields capping upside gains. Otunuga draws attention to the following levels:
If prices dip below $1,640, it is possible to open a path towards $1,615 and $1,600. Still, a break above $1,675 would encourage the bulls to aim for the psychological $1,700 level.
Precious metals strategists have shifted their focus to the interest rates outlook. That’s why Otunuga points out that gold hasn’t benefited much from a softer US dollar in recent weeks.
“The relative weakness of gold is probably due to this”
Commerzbank precious metals analysts note that gold has weakened in many currencies, including the euro. However, both the Fed and the ECB point to more aggressive rate hikes. So analysts expect the pressure on the shiny metal to continue. In this context, analysts make the following comment:
The gold price has hardly profited from the recently weakening US dollar. Instead, the price is trading at $1,650, just slightly above the low posted on Friday. Gold’s relative weakness is likely attributable to still high and almost unchanged expectations for rate hikes, fueled by persistent hawkish comments from Fed and ECB representatives.
“This means bullish for the precious metal”
Brien Lundin from Gold Newsletter comments on the latest developments:
Looking ahead, however, the rising costs of paying off the federal debt, which will be updated with the third-quarter GDP calculation on Oct. 27, will put significant pressure on the Fed to at least halt rate hikes. And in turn, that means bullish for gold.
