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TD Securities sees gold falling lower; markets price in 75 bps move in September

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(Kitco News) - The gold market is again under pressure, falling below $1,850 an ounce as rising interest rate expectations drive the U.S. dollar to a 20-year high and bond yields to an 11-year high.

According to market analysts, inflation fears continue to dominate financial markets, and there are growing expectations that the Federal Reserve will have to act even more aggressively to bring down inflation.

The U.S. central bank is set to announce its monetary policy decision Wednesday. It has signaled that it is looking to raise interest rates by 50-basis points at this meeting and the one in July.

Commodity analysts at TD Securities said that aggressive rate hikes beyond the summer could keep pressure on gold in the near term. Markets are now looking for the Federal Reserve to lift interest rates by 75 basis points in September.

"The next few Fed hikes are set in stone, which limits the relevance of imminent data releases to the left tail of Fed funds pricing, but the market has aggressively challenged the right tail — bringing 75bp hikes into scope. In turn, the trading bias is still to the downside," TDS said in a note Monday.

The market has become more hawkish on interest rate hikes as investors continue to digest Friday's inflation data. Last week the U.S. Labor Department said its Consumer Price Index rose 8.6% for the year in May, hitting a new 40-year high. Inflation could remain stickier for longer than expected after average gas prices in the U.S. hit a new record high on Sunday, rising above $5 a gallon.

Analysts at TD Securities warned that in the near-term rising interest rate will be negative for gold, which is a nonyielding asset. The Canadian bank sees gold prices dropping below $1,800 an ounce in the near term.

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The comments come as gold prices trade at $1,828.30 an ounce, down more than 2.5% on the day.

However, the analysts added that the selloff could leave the market healthier in the long run as there is a lot of complacency in the marketplace.

"Participants are still looking for catalysts to flush out the massive amount of complacent length. We see risks that technical breakdown could be the catalyst. Firstly, the bar for CTA liquidation is growing thin, as we estimate that a break below $1810/oz would catalyze a substantial selling program from systematic trend followers," the analysts said.

Looking past the short-term volatility and weakness, TDS still sees long-term potential for precious metals. Currently, the bank sees gold prices averaging the year around $1,841 an ounce.

In an interview with Kitco News Friday, Bart Melek, head of commodity strategy at TDS, said that the question remains whether the U.S. central bank can get ahead of the inflation curve. He added that he sees Federal Reserve "flaking out" on interest rate hikes.

"The Federal Reserve is not prepared to do what it takes to get inflation under control," he said.

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