The price of gold reached pandemic lows in 2020 as expectations of a Fed rate hike weigh on precious metals
(Kitco News) Gold came under pressure from expectations of a strong interest rate hike as US Dollar and Treasury yields soared. The precious metal has fallen nearly $40 from daily highs and hit its lowest in more than two years.
After failing to sustain the $1,700 level earlier this week, gold retreated further, touching the lows seen in April 2020.
“Gold is resisting the US dollar, expectations of another 75 basis point rate hike from the Federal Reserve,” Phil Strebel, chief market analyst at Blue Line Futures, told Kitco News.
The move accelerated when the precious metal fell below $1,685 an ounce, halting the selling, Streible noted.
After several major macro releases this week, including hotter-than-expected inflation data and better-than-expected retail sales, markets are now starting to price in full force regarding rate hikes.
“After absorbing this week’s data, the idea is that the Fed is in a position where it could be very aggressive with its next round of rate hikes. In addition, the market is getting nervous that a policy mistake could lead to a rough session,” said Edward Moya, Senior Market Analyst at OANDA, for Kitco News.
According to the CME FedWatch tool, there is a 78% chance of a 75 bps rise and a 22% chance of a 100 bps increase at the September meeting next week.
“On top of the September forecast, it looks like the Fed will keep raising rates for the rest of the year, and that’s impacting gold,” Strebel said. “People have been liquidated a lot and turned into cash. They are really worried about the hard landing.”
Gold futures for December were last at $1,676.90, down 1.88% on the day, after hitting a low of $1,668.90 earlier in the session. Meanwhile, the US dollar index rose 109.76, the 10-year Treasury yield was 3.45%, while the two-year bond yield was 3.84%.
Moya noted in this type of environment, investors are more likely to liquidate their gold positions than their stocks. “Gold fell to a two-year low and broke temporary support. The selling momentum was strong on Thursday,” he said.
More weakness in the gold market is not excluded before the Fed meeting in September next Wednesday, especially if it surprises the Fed with a 100 basis point hike. However, the majority of analysts expect an increase of only 75 basis points.
For gold to see a major recovery, the market needs to see a slowdown in rate hikes. That could happen within the next few months as economic data begins to deteriorate, Moya added, allowing the Federal Reserve to get off the monetary tightening pedal.
“We need to see inflation come down. The Fed has a balancing act to worry about. It can’t raise rates to 5% or much higher without feeling a lot of pain. The fear is that they are going to be overly aggressive, so the Fed is going to try to back out of that.” .
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