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Is gold at risk of a selloff next week? Analysts sound alarm as markets eye Fed, U.S. data

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(Kitco News) Gold is trying to hold above the $1,800 an ounce level, but analysts warn of a selloff risk in light of a stronger U.S. dollar.

One of the key things to watch is whether or not gold can hold the $1,797-90 support zone, said Pepperstone head of research Chris Weston.

Next week's main event will be the Federal Reserve's interest rate announcement, followed by the central bank Chair Jerome Powell's press conference, scheduled for Wednesday.

"It doesn't feel like we're in for a major announcement that shocks the U.S. rates market too intently, causing major gyrations in second-order derivates like the USD, equities and gold," Weston said.

And while the U.S. inflation is running hotter-than-expected, with the U.S. core annual CPI at 4.5% in June, the employment situation remains the top concern for the central bank.

At the June press conference, Powell reiterated that the Fed would signal "well in advance" before tapering its asset purchases or raising rates.

"Nuance matters though, and single words move markets – or in the case of the June FOMC it was the projections for the fed funds rate – the 'dot plot' – which kicked some volatility into markets, with calls for two hikes in 2023. It does not feel like Powell will upset the markets, but any narrative that builds a strong consensus that September could be the date for a formal announcement for tapering, could bring out sellers in U.S. Treasuries (yields higher), which could inject life into the USD and weigh on gold," Weston added.

One issue for gold is that it lacks new supportive drivers that could push prices well above the $1,800 an ounce level. This week was another proof of that as the precious metal failed to rally as equities plunged and the U.S. Treasury yields sold off.

"Gold prices are struggling to firm despite crumbling real rates. The yellow metal's persistent weakness against real yields points to a vulnerable microstructure, while at the same time, gold's inability to rally despite the risk-off trading environment highlights that speculative flows remain particularly weak," noted TD Securities commodity strategist Daniel Ghali. "Global macro growth angst catalyzed a repricing in expectations for Fed hikes, but gold still wasn't able to catch a bid, reinforcing the potential for a deeper pullback."

Ghali added that TD Securities is initiating a tactical short in active gold futures, projecting a drop towards $1,730 an ounce.

The path of least resistance for gold is downwards, added Gainesville Coins precious metals expert Everette Millman.

"Gold has seen some short-term volatility. Even though these price moves were not big, gold seems to be bouncing back at forth," Gainesville Coins precious metals expert Everette Millman said. "I am a bit bearish on gold right now."

After failing to move higher on the back of lower equities, gold might be at risk of a pullback as the stock market recovers, said TD Securities head of global strategy Bart Melek.

"Equities recovered all the losses. And we had a bit of an uptick in interest rate. That combination leads gold to correct here," Melek said. "We see $1,730 as support, but we don't expect the drop to that level today or tomorrow."

Is stagflation a real risk?

More and more analysts are starting to talk about stagflation as a rising concern for the U.S. economy. Stagflation is an environment of higher inflation and slower economic growth.

"Stagflation is a major risk this year. Even members of the Fed have been saying that they expect inflation to be higher for longer. When we get on the other side of the 'transitory inflation,' longer-term price pressures might still be above the Fed's target. If we combine that with lower growth, we get back to stagflation scenario," Millman said.

This is why markets will carefully monitoring next week's second-quarter GDP numbers. The release is scheduled for Thursday, with market consensus calls projecting to see growth at 8.6%.

"The GDP number will be big next week. A lot of the strange movements in the Treasury markets are based on the idea that growth will be lower," he said. "That is definitely positive for gold."

Data to watch

Monday: New home sales data.

Tuesday: Durable goods orders and consume confidence.

Wednesday: The Federal Reserve interest rate announcement and Jerome Powell's press conference.

Thursday: Q2 GDP data, jobless claims and pending home sales.

Friday: PCE price index.

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