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Gold price could drop below $1,800 as markets see 90% chance of 75 basis point hike

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(Kitco News) - The gold market remains under significant selling pressure and could be on its way below $1,800 an ounce as the market calls for the Federal Reserve to be even more aggressive get louder.

The Federal Reserve began its two-day monetary policy meeting Tuesday and was on track to raise interest rates by 50 basis points. However, Friday, the U.S. Consumer Price Index showed annual inflation hitting a new 40-year high at 8.6% last month.

According to the CME FedWatch Tool, markets now see a 90.5% chance of a 75-basis point move Wednesday. According to economists this would be the first time the Fed has moved this aggressively in 27 years.

Some analysts have said that these hawkish expectations are not good for gold in the short term.

"Gold took a real beating Monday, sinking almost 3% as investors priced in the chance for a 75-basis point U.S. rate hike following last Friday's smoking hot inflation figures," said Lukman Otunuga, Senior Research Analyst at FXTM. "Gold could be in store for more pain on Wednesday if Jerome Powell strikes a hawkish tone or signals that the Fed will maintain its aggressive approach toward raising rates. A solid daily close below $1800 could signal a decline back towards recent lows at $1765.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, noted that the only asset attracting investors' capital is the U.S. dollar.

"No one wants to take a chance in any asset other than the U.S. dollar before tomorrow's FOMC decision; even the traditional safe-haven assets are suffering right now," she said in a note Tuesday.

Along with the U.S. dollar, rising bond yields and rising real interest rates are also proving to be challenging headwinds for gold. 

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said in a report Tuesday that looking at gold's technical picture, prices are on pace to test support around $1,780 an ounce.

"Weekly chart shows that if $1,780 support is broken, there is no strong support before around $1,670. In order to reverse the bearish picture, a daily close above $1,880 is needed," he said.


Hedge funds still bullish on gold but market faces challenging environment

Hansen noted that 10-year real bond yields are trading around 0.65%, their highest level since March 2019 and are up from -1% seen at the start of the year.

"Based on the historic relationship between gold and real yields, some will argue that gold is currently overpriced by more than $300," he said.

However, Hansen added that despite the challenging technical picture, there is still strong fundamental support for the precious metal. He said that financial market turmoil, the growing inflation threat and rising stagflation risks will continue to support prices.

"We believe that hedges in gold against the rising risk of stagflation together with traders responding to the highest level of inflation in 40 years, as well as turmoil in stocks and cryptos, are some of the reasons why gold has not fallen at the pace dictated by rising real yields," he said.

Other analysts have noted that even if gold prices do fall, the market remains healthy, and lower prices could be seen as a buying opportunity.

"It is imperative for gold to remain constructive as those expectations play out. If it can, a time will come where inflation cools, and the Fed can take its foot off the gas. When that happens, it will be gold's time to shine," said analysts at Blue Line Futures.

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