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Why is gold down $90 this September? Analysts eye price risks below $1,700 an ounce

Kitco News

(Kitco News) Gold is looking to wrap September down nearly $90, and analysts are warning of a possible washout if gold tumbles below $1,700 an ounce.

The two-punch combination of surging U.S. Treasury yields and a higher U.S. dollar is pressuring gold down amid inflationary fears and risk-off sentiment in the marketplace, according to analysts.

At the time of writing, December Comex gold futures were trading at $1,725, down 0.72% on the day, while the U.S. dollar index was at 94.36, up 0.64% on the day, and the U.S. 10-year Treasury yield was fetching 1.541%.

"The yields and the dollar are the major part of it. There is an inverse correlation between higher yields and metals. When yields are popping, metals are down, and the USD is up," RJO Futures senior commodities broker Daniel Pavilonis told Kitco News.

Gold is "just hanging in there," Pavilonis said, noting that if the precious metal falls below $1,673, the market could see a washout to $1,550 an ounce.

Considering the U.S. dollar index jump, gold is holding up pretty well, said MKS PAMP GROUP head of metals strategy Nicky Shiels.

"Gold is currently sitting at $1,730 (same level when Bitcoin hit its $60K peak and all the furor was about cryptos, less so precious). The ever-important $1,675 handle (triple bottom but also near where the bulk of ETF holders are long at) is nearby. Beyond that, $1,560 is where gold has technically erased all 'COVID premium' (a stretch we believe)," Shiels said on Wednesday. "Gold needs to reclaim an old floor ($1,750) before 50DMA is in view ($1,786)."

After the Fed Chair Jerome Powell signaled that tapering could begin in November and end by the middle of next year, all the near-term risk-off sentiment has gone to benefit the U.S. dollar and not gold, Shiels pointed out.

"Any near-term uncertainty (over debt ceiling, Feds taper, inflation worries, China etc) has then been channeled into the safety of the US$ alone, which is the dominant driver behind the persistent pressure in Gold & Silver," she said.

And a significant repricing of the U.S. dollar to the upside could lead to a bigger selloff in gold, Shiels added. "If the current repricing in rates & USD$ continues, putting real yields out of the negative territory, and the USD$ back near COVID highs (which would be a massive move…), that implies Golds fair price is in the $1,450-$1,470 range."

With the 10-year Treasury yield looking at a move towards 1.60%, gold is on "thin ice," said OANDA senior market analyst Edward Moya.

"The $1,700 level seems imminent for bullion, with many traders eyeing the March lows ahead of $1,670 as critical support. The reset of inflation expectations has not benefited gold prices at all, in fact, it has been the primary driver for Treasury yields," Moya said. "If gold can show signs of stabilizing, then longer-term investors will return and bet on the 2022 global economic recovery that will ultimately lead to a weaker dollar."

Despite all of this, there are still gold bulls out there who cite massive money printing. But the precious metal is not responding with a higher price target.

"Gold is an inflationary hedge," said Pavilonis. "But rates are going higher, which steals the rationale why gold would go up. There will come the point when rates are not high enough to hedge inflation. And the cat could be out of the bag towards the end of the year or by the middle of next year."

Also, the good news for precious metals investors is that gold's inverse relationship to higher yields won't last forever, according to Pavilonis. "Tapering is not raising rates, and if the Fed rejects the notion of raising interest rates for longer, there is a possibility there will be a mismatch with actual inflation," he said.

This year, the Federal Reserve has worked very hard to create a psychological narrative that inflation is temporary and the market believes it, Pavilonis noted. But the coming energy crisis and longer-lasting supply bottlenecks are questioning that type of thinking.

"We are seeing this in natural gas, cotton, and going to see that in grains again shortly. I don't think this is temporary. This is the beginning of larger waves to the upside," he said.

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