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(Kitco News) – Gold is trading near a 2.5-year low after a tightening Federal Reserve boosted the U.S. dollar and Treasury yields. This macro environment is likely to drive more people away from gold and create a great buying opportunity, according to analysts.
Market volatility and dramatic exchange rate effects did not leave gold untouched as the precious metal fell another 1.7% this week. After raising interest rates by 75 basis points for the third straight day, the Fed raised its benchmark interest rate to 4.4% by the end of 2022 and to 4.6% in 2023.
For markets, this could lead to another 75 basis point gain in November and another 50 basis point gain in December.
“We have seen significant increases in market estimates of what the Federal Funds Rate will do over the next year. That’s quite a big change from a month ago, and it’s consistent with the more aggressive Fed,” TD Bart Melek, global head of commodity markets strategy at Securities, told Kitco News. “Real interest rates are rising. This is negative for gold. High holding costs and high opportunity costs are likely to drive away capital.”
This type of hawkish stance also means that the peak of the US dollar rally is still some time away, which is bad news for gold.
“Looks like this dollar rally will not peak. The current market environment is likely to remain worrying. Expectations for a rate hike by the Fed have varied widely, Kitco News said. “The problem is that we don’t see the economy weakening quickly. When we do that, you will see the dollar peak. For gold, it’s all about when we see that.”
With the Dow hitting its lowest level for the year on Friday and more volatility on the horizon, gold is unlikely to see a strong rally in the near term. “We’re not going to get a strong rush to buy gold just yet. There are low volatility instruments out there that will bring you some returns now. That’s taking gold away,” added Moya.
Eventually gold will become a safe haven again as the appetite for equities wanes. But before that happens, the economy needs to slow down, and inflation needs to slow down. “Once we see inflation moving to more benign levels, the Fed can quickly reverse. Once she’s moved from a moderate to a restrictive stance, she can go the other way. But that is unlikely in the foreseeable future,” emphasized Melek.
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 start to see buyers emerging. Gold will benefit from safe-haven inflows abroad,” Moya said.
Melek also thinks gold is likely to drop below $1,600 an ounce. “Volatility will be higher going forward. As volatility increases, margin calls increase. Long positions cannot be expanded. We won’t see any major re-entry of positions. Bad environment for gold,” he described.
Gold is watching the upcoming September jobs and inflation data. “The market is still looking at very tight labor conditions in the US and that wage pressures will continue to be an issue,” Melek said.
Market consensus sees the US economy adding 300k jobs in September, with the unemployment rate at 3.5%, a near 50-year low.
On the plus side, gold is a great entry point for buyers at these levels.
“That makes physical gold cheaper. It’s a buying opportunity. The Fed has emphasized that it has a dual mandate. And if inflation is under control, the Fed could quickly reverse in 2023. Real interest rates will be much friendlier to gold. I expect gold to do well over the long term,” Melek said.
However, for now, resistance lies at $1,678-80 and support around $1,580 an ounce, he added.
Next week’s data
Tuesday: Fed Chair Powell speaks, US Durable Goods Orders, CB Consumer Confidence, New Home Sales
Wednesday: Upcoming home sales in the US
Thursday: US Unemployment Claims, Q2 GDP
Friday: US Personal Income and PCE Price Index, Michigan Consumer Sentiment
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