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(Kitco News) – Gold is trading near 2.5-year lows after a hawkish Federal Reserve sent the US dollar and Treasury yields higher. This macro environment is likely to push more people away from gold, creating a great buying opportunity, according to analysts.
Volatility in the markets and dramatic FX plays did not leave gold untouched as the precious metal fell another 1.7% this week. After raising rates by 75 basis points for the third time in a row, the Fed upped its funds rate to 4.4% by the end of 2022 and to 4.6% in 2023.
For markets, this could translate into another 75-basis-point hike in November and an additional 50-basis-point 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 is quite a big difference from a month ago, and it is in line with the Fed being more aggressive,” TD Securities global head of commodity markets strategy Bart Melek told Kitco News. “The real rates are rising. That’s negative for gold. High cost of carry and high opportunity cost will probably drive capital away.”
Also, this type of hawkishness means that the peak in the US dollar rally is still some time away, which is bad news for gold.
“Looks like this dollar rally is not peaking. The current market environment will likely remain unsettling. Fed rate hike expectations are widely swinging. We are not going to see that ease up until we see inflation come down,” OANDA senior market analyst Edward Moya told Kitco News. “The problem is that we do not see the economy weaken quickly. When we do, that’s when you’ll see a peak in the dollar. For gold, it is all about when we see that.”
With the Dow touching the lowest level of the year Friday and more volatility ahead, gold is unlikely to see a strong rally in the short term. “We will not get a strong rush to buy gold just yet. There are low volatility instruments out there that are now giving you some yield. That is taking away from gold,” Moya added.
Eventually, gold will become a safe haven again as the appetite for equities wanes. But before that happens, the economy needs to slow, and inflation needs to decelerate. “Once we start seeing inflation moving into a more benign type level, the Fed can quickly turn. As they went from dovish to hawkish, they can go the other way. But it is unlikely any time soon,” Melek pointed out.
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 emerge. Gold will benefit from safe-haven flows abroad,” said Moya.
Melek also sees gold falling below $1,600 an ounce as likely. “Volatility will be higher going forward. As volatility increases, margin calls increase. Long positions can’t be extended. We are not going to see a big reentrance of positions. Nasty environment for gold,” he described.
Gold is watching the upcoming employment and inflation data from September. “The market is still looking at very tight labor conditions in the US and implication that wage pressures will continue to be an issue,” Melek said.
Market consensus calls are looking for the US economy to have created 300,000 positions in September, with the unemployment rate at 3.5%, which is near 50-year lows.
On a positive note, gold at these levels is a great entry point for buyers.
“This makes physical gold cheaper. It’s a buying opportunity. The Fed has been stressing that they have a dual mandate. And as inflation gets under control, the Fed could be quick to reverse in 2023. Real rates will be much more friendly to gold . I do expect gold to do well in the long-term,” Melek said.
However, for now, resistance is at $1,678-80, and support is around 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 jobless claims, GDP Q2
Friday: US personal income and PCE price index, Michigan consumer sentiment
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