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Gold price erases $35 on U.S. dollar strength, all eyes on FOMC minutes, jobs data

Kitco News

(Kitco News) The precious metals market was in the red Tuesday, with gold tumbling $35 as the U.S. dollar index surged to 20-year highs and markets focused on the Federal Reserve's meeting minutes and the U.S. jobs report.

Gold saw a sharp selloff after falling below $1,800 an ounce. August gold futures were last at $1,766.50, down $35 on the day.

"The firm U.S. dollar has caused the gold price to nose-dive further, with the result that it dropped noticeably below the $1,800 per troy ounce mark," said Commerzbank analyst Carsten Fritsch.

The U.S. dollar index climbed to 106.66 Tuesday, once again rising to 20-year highs. The greenback was also trading at 20-year highs against the euro.

Investors are flocking to the U.S. dollar as a safe-haven currency after the Federal Reserve embarked on a very aggressive tightening path to get inflation under control.

Stocks also plunged Tuesday, with the Dow falling 2.3%, the S&P 500 dropping 2% and the Nasdaq down 0.9% on the day.

All eyes are on the FOMC minutes from the June meeting, with markets looking for clues related to the upcoming rate hike path and any new recession comments from the Federal Reserve members. The minutes are scheduled to be released Wednesday.

"The June FOMC minutes may tilt the balance towards markets fully pricing in a 75bp rate hike at the end of this month, should there be some indication of a growing consensus at the June meeting," ING FX strategists said.

The CME FedWatch Tool shows an 85.6% chance of a 75-basis-point rate hike at the July meeting and only a 14.4% chance of a 50-basis-point hike.

The U.S. dollar is likely to keep its strength while another 75bps is on the table. The only thing that could change this hawkish view would be a concerning jobs report from June (to be released Friday) or slowing inflation data.

"The Fed has made it clear that it is resolutely focused on getting inflation under control so we will either need to see a very weak jobs report, published on 8 July, or, but quite possibly together with, a surprise drop in inflation, out 13 July, that reflects declines in a broad range of categories," said ING chief international economist James Knightley.

Live 24 hours gold chart [Kitco Inc.]

Gold will continue to watch and react to the U.S. dollar, but a break below $1,780 puts gold in a dangerous zone.

"This range would imply that gold would succumb to the weight of the most hawkish central bank regime since the 1980s. This scenario implies that a sustained downtrend could form in gold should the large CTA selling program catalyze a breakdown in prices," said TD Securities global head of commodity strategy Bart Melek. "After all, as central banks face a credibility crisis, they could remain committed to their battle against inflation and keep rates elevated for longer than recession odds would otherwise imply."

According to Melek, bias remains to the downside in gold as the precious metal looks for support below $1,800 an ounce.

On the physical side, gold demand could see some hurdles as India increased the basic import duty on gold from 7.5% to 12.5%.

"[This was done] to control foreign currency outflow as the Indian Rupee plunged to a record low against the U.S. Dollar. India is a major importer of gold, with imports of around 107 tonnes in May. Higher prices in the local market are likely to weigh on gold demand in the immediate term; especially when higher interest rates have already increased the relative cost of procuring and holding gold," warned ING's head of commodities strategy Warren Patterson.

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