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Real fears of rising rates take gold lower on the Fed’s hawkish demeanor

Commentaries & Views

As of 5:05 PM EDT gold futures basis, the most active December Comex contract is currently fixed at $1735.60 after factoring in today’s decline of $14.10 or 0.81%. September silver is also trading lower with the most active futures contract currently fixed at $18.50 after factoring in today’s decline of $0.407 or 2.19%. Both precious metals have declined over the last three trading days but silver has had a much larger percentage decline than gold based on the recent hard decline in U.S. equities that directly affect the industrial demand for silver.

The dollar has been in essence neutral with fractional declines or advances over the last three days. Today the dollar index is fixed at 108.795 after factoring in today’s decline of 0.005 points. That means that the totality of price declines witnessed since Chairman Powell’s Keynote speech at last week’s Jackson Hole Economic Symposium has been driven by market participants actively selling both gold and silver.

In essence, the primary message that Chairman Powell delivered on Friday was that the Federal Reserve will continue to raise rates to reduce inflation “until the job is done”. This idea still lingers in the forefront of market participants' minds. Yesterday gold futures traded to a low of $1731.80 but quickly recovered as market participants bought the dip. Yesterday gold closed at $1750 almost $20 above yesterday’s low.

That is dramatically different from what we are witnessing in trading today. Gold futures are only a few dollars above today’s low which is $1732.90. Although gold’s price range contained a lower high and higher low than yesterday the price decline from open to close is noticeably different.

According to the CME’s FedWatch tool, there is a 68.5% probability that the Federal Reserve will raise rates by 75 basis points during the September FOMC meeting. Although it is a slight decline from yesterday’s probability assessment which predicted a 75% probability of a 75-basis point rate hike in September, one week ago the FedWatch tool was predicting a 47.4% probability.

The chart above is a daily Japanese candlestick chart of December gold futures. Based on our technical studies yesterday and today’s lows occurred just below the 61.8% Fibonacci retracement. The data set used for this study begins at $1678 up to the most recent short-term price top at $1824. Although fundamental forces could continue to take gold pricing lower it is at a price that is a deep but valid price correction (61.8%).

However, if the 61.8% Fibonacci retracement does not hold the next logical place to look for technical price support occurs at the 78% Fibonacci retracement of $1710.30. That is an extremely deep but acceptable correction.

The caveat to looking at these technical support levels is that overwhelmingly financial markets including precious metals have been headline driven and Friday’s keynote speech was an exceedingly strong fundamental event that had repercussions throughout the majority of asset classes.

The two major fundamental events that will occur before the Fed convening for their Open Market Committee meeting on September 20 -21 are This Friday, September 2 the Labor Department will release its non-farm payrolls jobs report. Then on September 13, the government will release the inflationary data vis-à-vis the Consumer Price Index. However, it is unlikely that the Federal Reserve will take its foot off the higher rate gas pedal regardless of the data revealed in both reports.

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Wishing you as always, good trading,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.