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TD Securities entering tactical gold short following Fed-induced rally

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(Kitco News) - The gold market is holding a new critical support level heading into the weekend and could be on the cusp of a short-squeeze rally; however, one Canadian bank sees the latest price action as an opportunity to sell.

Friday, in a note to clients, commodity analysts at TD Securities said that they were initiating a tactical short position in gold. The new bearish bet comes as gold prices see a solid bounce this week, following the Federal Reserve's decision to raise interest rates by another 75 basis points.

December gold futures are trading at a two-week high at $1,782.10 an ounce, up 2% from last Friday. Gold has pushed higher as markets are interpreting comments from Federal Reserve Chair Jerome Powell that the central bank is closer to the end of its tightening cycle.

Wednesday, Powell said that future rate hikes would remain focused on inflation but be data-dependent; however, he added that the central bank would expect to scale back its pace of tightening as the economy reacts to higher interest rates.

"We enter into a tactical short position in gold, anticipating that a repricing in Fed expectations will exacerbate ongoing outflows in the yellow metal, leading to lower prices. Gold bugs are falling like dominoes, but given the slowing trend in growth, Chair Powell catalyzed a short covering rally across all assets by tying a jumbo-sized September hike to data," the analysts said.

TD Securities said that the price level to watch will be $1,780 an ounce as this hurdle needs to be cleared to spark a short-covering rally.

Although gold prices are poised to move higher, TD Securities said that gold prices remain in a long-term downtrend.

"Gold markets are set up for additional price weakness to ensue, considering that the massive inflows into gold ETFs continues to reverse, pressuring other speculative cohorts to unwind their bloated length in the yellow metal," the analysts said. "The risk of a CTA buying program associated with the recent rally is mitigated by a wall of offers tied to both prop-traders and ETF outflows. And, the massive complacent position built by other reportables since 2020 is at risk of joining into the liquidation vacuum, particularly as we approach their pandemic-era entry levels."

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