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Gold price takes a step back after Fed speak

Kitco News

(Kitco News) The gold market's price action is taking a breather following hawkish commentary from the Federal Reserve speakers, with prices pulling further away from the $1,800 an ounce target.

The gold price jumped to a daily high of $1,805 an ounce Tuesday morning, led by increased geopolitical tensions as House Speaker Nancy Pelosi landed in Taiwan amid China's threats of "serious consequences" for her visit.

However, gold gave back all of its daily gains following aggressive rhetoric from the Fed, with December Comex gold futures last trading at $1,777.10, down $10 on the day.

"Gold pared gains after Wall Street became optimistic that tensions between the two world's largest economies would get out-of-hand," said OANDA's senior maker analyst Edward Moya. "A strong dollar is also weighing on gold as the greenback's pullback over the past couple weeks appears to be over."

Chicago Fed President Charles Evans said Tuesday that the U.S. central bank would likely keep using oversized rate hikes until it sees inflation coming down. Evans added that he is not ruling out a 50-basis-point hike in September.

"If you really thought things weren't improving…50 (basis points) is a reasonable assessment, but 75 could also be okay. I doubt that more would be called for," he told reporters Tuesday.

San Francisco Fed President Mary Daly also spoke Tuesday, stating that inflation is still a problem. The Fed has "a long way to go" before it reaches its price stability goals, especially after June's inflation pace accelerated to 9.1% from a year ago, Daily said during an interview on LinkedIn. "We are still resolute and completely united," she said.

Everything is data-dependent going forward, Daly added, echoing Fed Chair Jerome Powell's statements from last week. "I really am looking to see what those data tell us to see if we can downshift a little bit the pace of rate hikes, or if we need to continue" outsize hikes, Daly said.

Evans and Daly are not voting members this year, but their comments reveal some behind-the-scenes thinking.

The hawkish comments come after the U.S. central bank raised rates by 75 basis points last week for the second time in a row. At the time, Powell also stated the U.S. is not in a recession, meaning another "unusually large" rate hike could be in store in September, followed by a slowdown in tightening

"I don't think the U.S. is currently in a recession. There are too many areas of the economy that are performing too well. I would point to the very strong labor market. [It is] true that growth is slowing … [But generally], GDP numbers [are] revised pretty significantly. You tend to take first GDP reports with a grain of salt," Powell said, referencing the first reading of the Q2 GDP report.

Data-wise, signs point to still problematic inflation numbers and a slowdown in the economy.

This week, markets are still digesting the Fed's preferred inflation gauge - the personal consumption expenditures price index - rising 6.8%, the most significant annual increase since the 6.9% posted in January 1982.

Also, the U.S. second quarter GDP shrank 0.9%, marking the second quarterly contraction in a row and meeting the technical definition of a recession.

Going forward, Powell said he wants to make decisions meeting-by-meeting and move away from providing clear guidance regarding the exact magnitude of the rate hikes to come. There are two more inflation and labor data reports to be published before the September Fed meeting.

Live 24 hours gold chart [Kitco Inc.]

For gold, a strong U.S. dollar will continue to be an obstacle to higher prices, noted Moya.

"The U.S. dollar got a major boost as the latest round of Fed speak supports the idea that the interest rate differential will widely remain in the dollar's favor," he said. "Geopolitical jitters could also draw safe-haven flows mainly into Treasuries and that will support the dollar. Gold is trying to be a safe-haven again and this latest round of international risks to the outlook will let us learn quickly if it becomes one."

For gold to see a notable change in trend and a sustainable bull rally, the precious metal needs to trade well above the $1,800 an ounce level, according to strategists at TD Securities.

"The prevailing risk-off tone in the market tied to U.S.-China relations has further supported the yellow metal via modest haven flows," they said Tuesday. "Nonetheless, for further significant short covering from CTA trend followers to take place, gold prices would need to close north of $1,820/oz to spark a change in trend signals … We see risks that Fed speakers can push back against market expectations for an early Fed pivot. In this sense, gold markets are faced with a massive amount of complacent length held by prop traders, which still hold the title as the dominant speculative force in gold."

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