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Fed to err on the side of too many rate hikes: Why is gold at $1,800?

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(Kitco News) - Markets are anticipating the Federal Reserve to err on the side of tightening, with Chair Jerome Powell admitting this week that the real mistake would be failing to get inflation under control. 

Recession fears and the hawkish Federal Reserve triggered bouts of volatility this year - the S&P 500 had its worst half of the year since 1970, while Bitcoin saw its largest quarterly drop in more than a decade. For gold, however, it has been steady sailing, with the precious metal down just 1% since the start of the year. 

Analysts believe the precious metal has done a "spectacular job" of storing value. But many are neutral on the precious metal until more U.S. data show inflation peaking and growth slowing. 

The headline keeping many investors cautious this week was Powell stating that the U.S. central bank could take things too far and potentially risk a recession for price stability. 

"Is there a risk we will go too far? Certainly, there is a risk. But it's not the biggest risk to the economy. The bigger mistake to make would be to fail to restore price stability," Powell said during a policy panel at the ECB Forum on Central Banking in Sintra, Portugal.

At the time of writing, August Comex gold futures were trading at $1,808.50, roughtly unchanged on the day.

Making gold harder to read were many investors rebalancing their portfolios for the second half of the year in light of rising recession calls, OANDA senior market analyst Edward Moya told Kitco News. 

"There are some concerning calls from others that gold could be vulnerable to some further selling pressure here. That is if the dollar remains fairly supported," OANDA senior market analyst Edward Moya told Kitco News. "It is tough to assess the market's true views. We are seeing significant repositioning. But the outlook for gold should still be fairly sideways. Next week, there will be a lot of focus on whether or not we see any signs that Fed members are becoming more optimistic that inflation is cooling."

There are already signs that the slowdown is hitting the economy a little faster than many anticipated, Moya added.

"We really need to see data showing that inflation peak is in place. We are in a choppy period because that question won't be answered by one data point. We need to see a few reports. And you need to hear from corporate America, and right now, that is not the case," he said. 

Since touching $2,000 back in March, gold has been stuck in the "sell the rallies" type of trading, Walsh Trading co-director Sean Lusk told Kitco News. 

"The problem for gold is all the rallies are being sold because of how hawkish the Fed is. There is no love here for the precious metal when the economic outlook is so uncertain. Plus, there are different takes on whether inflation is peaking or not," Lusk said. 

In this environment, gold and silver won't see a bounce for another couple of weeks. This is why Lusk is waiting for a better seasonal time frame when more physical gold is bought.

Gold prices remain down but making a move back to $1,800 as ISM manufacturing PMI falls to 53

"Mid-to-late July is where we could get some movement to the upside. During the second half of the summer and into the Labor Day weekend is when demand for physical increases," he noted. 

For now, there is a risk that gold could tumble to the $1,780 suport level. If that fails, the precious metal is at risk of falling to $1,730 an ounce. This is the price floor where Lusk expects to see a move higher. "The $1,782 level is May's low. If we blow through that, the next target is $1,760 — the pre-Christmas low and then it is $1,730. That could be where we go until we see a bounce," he said. 

Moya is watching the $1,785 an ounce level, citing significant support around that range. "If it gets uglier for gold over the next week of trade, it should have major support at $1,785, and that could hold as the dollar peak might be in place," he said. 

Next week's data:

Tuesday: U.S. factory orders
Wednesday: U.S. ISM non-manufacturing PMI 
Thursday: U.S. ADP nonfarm employment, jobless claims
Friday: U.S. nonfarm payrolls 

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