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Gold price is 'vulnerable' after $35 drop, last week's rally loses steam - analysts

Kitco News

(Kitco News) Gold has lost its last week's gains as prices dropped below $1,800 an ounce on Tuesday as a stronger U.S. dollar and higher U.S. Treasury yields put pressure on the precious metal.

The market is anticipating that the Federal Reserve can continue to ignore rising inflation following a big miss on the U.S. employment front.

"Gold prices tumbled as Treasury yields soared higher on expectations a delayed recovery would allow the Fed to tolerate higher inflation in the short-term," said OANDA senior market analyst Edward Moya. "Wall Street is ever so slightly more concerned with inflation and with Fed tapering likely happening in December, the curve will steepen and that should prove short-term negative for gold."

December Comex gold was last at $1,800.20, down 1.83% on the day, while the 10-year Treasury yield was at 1.36% and the U.S. dollar index was at 92.47.

The U.S. August jobs report revealed that only 235,000 positions were added instead of the anticipated 720,000.

"Coupled with the resurgence of Covid, it likely removes any chance of a Fed September taper, but November still looks good," said ING chief international economist James Knightley.

The slowdown in job gains could indeed mean a more patient Federal Reserve going forward, especially regarding the highly anticipated tapering announcement.

"The 235k NFP gain was very disappointing … Yet it's not entirely clear if this is a supply issue or a demand issue for the labor market. Because of this uncertainty, we have moved back the Fed's expected tapering announcement from the September 21-22 FOMC meeting to the November 2-3 meeting," said BBH Global Currency Strategy head Win Thin. "There will be some debate in the market about whether the Fed will actually start tapering at the December 14-15 meeting or wait until January 25-26."

Tuesday's nearly $35 gold drop is a significant reversal of last week's 1% rally. And at these levels, the precious metal is "vulnerable" to further selloffs, Moya added while noting that the current bearish sentiment is a temporary one.

"[The precious metal] could fall towards $1,755, and if that level easily breaks, one last push lower could see prices target the $1700 level," Moya said. "Once the market can see past these next few months of pricing pressures, the reality of global disinflation forces will likely put an abrupt end to the move higher in Treasury yields, triggering a resumption of gold buying for many investors."

Live 24 hours gold chart [Kitco Inc.]

This week, markets will be paying close attention to the European Central Bank (ECB) interest rate decision on Thursday and whether there will be any new tapering announcement.

"Focus on ECB & presser on Thursday given recent hawkish comments (they are expected to announce a slower pace of bond purchases beginning in the Q4 given niggling inflation and a debate over when to shift off crisis mode). There should be (bullish) implications for the EUR if the ECB tapers ahead of the Fed into yearend, which would continue to keep the commodity inflation trade in play," said MKS PAMP GROUP head of metals strategy Nicky Shiels.

Also on the radar will be Fed speakers on Wednesday and Thursday and U.S macro data releases, including the latest U.S. PPI numbers.

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