(Kitco News) Gold ends the week down more than $50 as a strong US dollar weighs on the precious metal ahead of the Jackson Hole economic symposium.
Unsurprisingly, gold is reacting to the dollar’s strength as it faced this particular headwind for most of the summer as the Federal Reserve aggressively hiked interest rates.
“The dollar is on fire, rising against all major currencies and cutting through key technical levels like a hot knife through butter,” said Marc Chandler, Managing Director of Bannockburn Global Forex. “Gold that started the week at $1,800 is now testing the $1,750 support.”
At the time of writing, Comex gold futures for December were trading at $1,763 an ounce, down 3% on the week.
Next week’s big catalyst will be Federal Reserve Chair Jerome Powell’s keynote address in Jackson Hole entitled “Economic Outlook” scheduled for Friday.
Markets remain divided on whether the Fed will hike rates by 50 basis points or 75 basis points at its September meeting. The CME’s FedWatch tool shows a 56.5% chance of a 50 basis point rise and a 43.5% chance of a 75 basis point rise.
Markets will be eager to see any change in the Fed’s stance on interest rates, RJO Futures senior commodities broker Bob Haberkorn told Kitco News.
“The Fed is likely to stick with higher interest rates going forward. That is why gold is currently declining slowly and steadily. If anything changes at the Jackson Hole symposium, it could have a significant impact on the gold market. But that is not expected. But they could say something about the housing market slump or retail,” Haberkorn said. “Overall, given the rate hike talk, the stock market is not in bad shape. Is the stock market telling us the Fed won’t be as aggressive? The gold market tells us a different story because gold competes with government bond yields.”
So far, the Fed has remained fairly consistently hawkish despite some mixed signals from the latest Fed meeting minutes released this week, said Gainesville Coins precious metals expert Everett Millman.
The July FOMC meeting minutes showed that Fed officials agreed that the tightening cycle must eventually slow. Still, they believe the Fed needs to see how its rate hikes affect inflation.
“The Fed’s hawkish stance is embedded in market expectations,” Millman said. “Treasury yields are also rising again. One thing for gold is that the real interest rate is highly correlated with the price of gold. As expectations for higher interest rates are anchored lower, gold will normalize and real interest rates will have a more neutral impact. Right now they are dampening the price of gold.”
While it is prudent to await another round of inflation and employment data before making any firm estimates, ING, International’s chief economist James Knightley expects a 50 basis point move at the September Fed meeting.
“We currently favor 50bp moves in September and November with a final 25bp hike in December, but should payrolls rise again sharply (350k+) and inflation pick up then we would likely be on September 21st move to a 75bp hike,” Knightley said.
gold price level
Any gold price rallies were short-lived, said John Weyer, co-director of Walsh Trading, adding that if gold falls below $1,770 an ounce, the $1,715 level comes into play.
Haberkorn warned of lower prices ahead of the Jackson Hole symposium next week, adding that the US dollar could rise significantly. “It’s difficult for gold to recover in this environment,” he said. “Gold’s support is around $1,720 and then falls to $1,700. There will be buying below this level.”
It’s important to remember that although the US dollar has risen against its peers, it is still losing on inflation, Millman noted. “Gold holds its value and does what it’s supposed to do,” he said.
Strong resistance currently stands at $1,800 an ounce. But on the support side, gold could drop towards $1,600, Millman added. “In the short term, there is no solid bottom until we get to $1,600. I don’t expect gold to end the year that low. But there is downside risk below $1,700 in the near term,” he said.
Next week’s data
Tuesday: US new home sales
Wednesday: US Durable Goods Orders, upcoming US Home Sales
Thursday: US Q2 GDP revision, US jobless claims, ECB minutes
Friday: Powell’s Jackson Hole speech, US PCE price index, Michigan consumer sentiment
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