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Gold encounters technical and fundamental resistance at $1980

Commentaries & Views

Gold futures are definitely under pressure today, with the most active August 2023 contract down $8.70 or 0.44% and fixed at $1972.10. The root cause is dollar strength that overcame fractional buying and still was able to take gold prices moderately lower. While gold futures declined by 0.44% the dollar gained 0.56% with the differential indicating that market participants were lightly bidding the precious yellow metal higher. Currently, the dollar index has moved back over 100 and is currently fixed at 100.545.

This can also be seen in spot gold pricing which according to the Kitco Gold Index (KGX) is currently fixed at $1969 per ounce, down $7.50 on the day. However, on closer inspection dollar strength reduced an ounce of gold by $10.50, and normal trading bid gold prices $3.00 higher resulting in today's decline.

This is quite different from silver pricing today which is also trading lower. Currently, the most active September 2023 futures contract is fixing silver prices at $24.95 down approximately $0.44. Spot silver is currently fixed at $24.72 after factoring in today's decline of $0.39. However, unlike gold prices silver traded lower from both dollar strength and market participants bidding silver lower. Dollar strength accounted for a decline of $0.13, and selling pressure by investors took an ounce of silver $0.26 lower resulting in today's $0.39 price decline.

In the case of gold, the fractional buying was a sign that market participants still believe that there is upside potential based on positive market sentiment that the Federal Reserve might only raise interest rates ¼%, rather than their recent announcement that they would raise rates by ¼% two more times this year. According to the CME's FedWatch tool, there is a 99.8% probability that the Federal Reserve will raise rates at next week's FOMC meeting by ¼%. The FedWatch tool is predicting that after raising rates this month they will pause at the September meeting with the probability of that occurring at 83.9%, a 66.2% probability that they will continue to hold rates between 5 ¼% and 5 ½% in November, and a 60.8% probability that the Fed will do the same thing in December leaving rates where they will be after one more rate hike.

This differs from silver because the silver investors have implemented a round of aggressive profit taking moving both spot and futures prices back below $25. Silver futures traded to a double top Wednesday and today after hitting intraday highs at approximately $25.48. The editor of Kitco News, Neils Christensen interviewed Huw Roberts, the head of analytics at Quant Insight today where he said that “according to the firm's modeling, the silver price is about 5.7% overvalued." He said that fair value is around $23.86 an ounce. Adding that, “The signals we are starting to see in silver are getting interesting… The rally in silver has overshot its fundamentals."

Our technical studies have shown that it is highly probable that the recent decline in the dollar has concluded after the dollar index bottomed at 99.25 on Tuesday. In fact, since July the dollar index was trading well above 103. On July 6 the dollar hit an intraday high of 103.27 and began a strong decline in value trading lower for seven consecutive days resulting in recent lows in the dollar approximately 3% lower than the high achieved the first week of July. In other words, the dollar lost approximately 3% in value when compared to the basket of six currencies it is weighted against. We believe on a technical basis that the dollar index will increase short-term taking the index to approximately 101.50 before encountering any technical resistance.

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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.