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Can Fed Chair Powell's Jackson Hole speech give gold price its break next week?

Kitco News

(Kitco News) Gold is wrapping up the week down more than $50 as a strong U.S. dollar is weighing on the precious metal ahead of the Jackson Hole economic symposium.

It is not surprising to see gold react to the greenback's strength, as it has been facing this particular obstacle for most of the summer with the Federal Reserve aggressively raising rates.

"The dollar is on fire. It is rising against all the major currencies and cutting through key technical levels like a hot knife in butter," said Bannockburn Global Forex managing director Marc Chandler. "Gold, which began the week near $1,800 is testing support near $1,750 now."

At the time of writing, December Comex gold futures were trading at $1,763 an ounce, down 3% on the week..

Next week's big catalyst will be the Federal Reserve Chair Jerome Powell's keynote at the Jackson Hole titled 'Economic Outlook,' which is scheduled for Friday.

Markets remain divided on whether the Fed will hike rates by 50 or 75 basis points at its September meeting. The CME's FedWatch Tool shows a 56.5% probability of a 50bps hike and a 43.5% chance of a 75bps increase.

The markets will be keenly watching any change in the Fed's stance on rates, RJO Futures senior commodities broker Bob Haberkorn told Kitco News.

"The Fed will likely hold the line on higher rates going forward. That's why gold is slow and steady lower right now. If there is some change at the Jackson Hole symposium, it could impact the gold market significantly. But that is not anticipated. Yet, they could say something about the housing market slump or the retail sector," Haberkorn said. "Overall, the stock market is not in bad shape considering the rate hike talk. Is the equity market telling us that the Fed won't be as aggressive? The gold market tells us a different story because gold competes against Treasury yields."

So far, the Fed has been pretty consistent at staying hawkish despite some mixed signals from the latest Fed meeting minutes released this week, said Gainesville Coins precious metals expert Everett Millman.

The FOMC meeting minutes from July showed that Fed officials agree on the need to slow down the tightening cycle eventually. Still, they believe the Fed needs to see how its rate hikes impact inflation.

"The Fed's hawkishness is embedded in market expectations," Millman said. "Treasury yields are also rising again. One thing for gold, the real rate of interest has a strong correlation to the gold price. As expectations for higher rates get embedded deeper, gold will normalize, and real rates will have a more neutral impact. Right now, they are placing a damper on the gold price."

While it is wise to wait for another round of inflation and employment data before making concrete estimates, ING chief International economist James Knightley is looking for a 50bps move at the September Fed meeting.

"We currently favor 50bp moves in September and November with a final 25bp hike in December, but should payrolls rise strongly yet again (350k+), and inflation move upwards, then we would likely switch to a 75bp hike on 21 September," Knightley said.

Gold price levels

Any gold price rallies have been short-lived, said Walsh Trading co-director John Weyer, adding that if gold falls below $1,770 an ounce, the $1,715 level comes into play.

Haberkorn warned of lower prices next week ahead of the Jackson Hole symposium, adding that the U.S. dollar might be up significantly. "It is hard for gold to rally in this environment," he said. "Gold's support is around $1,720 and then down at $1,700. There is going to be buying below that level."

It is important to remember that even though the U.S. dollar is up against its peers, it is still losing out to inflation, Millman noted. "Gold is holding its value and is doing what it is supposed to do," he said.

Strong resistance is currently at $1,800 an ounce. But on the support side, gold could tumble down toward $1,600, Millman added. "In the short term, there is no solid floor until we get into $1,600. I don't expect gold to end the year that low. But short-term, there is a downside risk below $1,700," he said.

Next week's data

Tuesday: U.S. new home sales

Wednesday: U.S. durable goods orders, U.S. pending home sales

Thursday: U.S. Q2 GDP revision, U.S. jobless claims, ECB minutes

Friday: Powell's speech at Jackson Hole, U.S. PCE price index, Michigan consumer sentiment

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