Gold price hits 2020 pandemic lows as Fed rate hike expectations weigh heavily on precious metal
(Kitco News) Gold caved under pressure from aggressive rate hike expectations as the U.S. dollar and Treasury yields climbed. The precious metal fell nearly $40 from daily highs and hit more than two-year lows.
After failing to hold the $1,700 an ounce level earlier this week, gold retreated even further, touching the lows last seen in April 2020.
"Gold is fighting the U.S. dollar, and expectations of another 75 basis point rate hike from the Federal Reserve," Blue Line Futures chief market strategist Phil Streible told Kitco News.
The move was accelerated when the precious metal fell below the $1,685 an ounce level, triggering sell stops, Streible noted.
Following several key macro releases this week, including hotter-than-expected inflation data and better-than-projected retail sales, markets are now pricing in full steam ahead regarding rate hikes.
"After digesting this week's data, the thought is that the Fed is in a position where it can be very aggressive with its next round of rate hikes. Plus, the market is getting more nervous that a policy mistake would lead to a severe session," OANDA senior market analyst Edward Moya told Kitco News.
According to the CME FedWatch Tool, there is a 78% chance of a 75bps hike and a 22% chance of a 100bps increase at next week's September meeting.
"On top of September expectations, it looks like the Fed will continue raising rate for the rest of the year, and that is weighing on gold," Streible said. "People liquidated a lot and have gone into cash. They are really worried about a hard landing."
December gold futures were last at $1,676.90, down 1.88% on the day, after hitting a low of $1,668.90 earlier in the session. In the meantime, the U.S. dollar index rose 109.76, and 10-year Treasury yields were at 3.45%, while the 2-year yields were at 3.84%.
In this type of environment, investors are more prone to liquidating their gold positions than their equities, noted Moya. "Gold dropped to the lowest level in two years and broke tentative support. Momentum selling was pretty strong Thursday," he said.
More weakness in the gold market is not ruled out ahead of the Fed's September meeting next Wednesday, especially if the Fed surprises with a 100bps hike. However, the majority of analysts are projecting just a 75bps increase.
For gold to see a substantial recovery, the market needs to see a slowdown in rate hikes. And that could happen within the next few months as economic data starts to deteriorate, allowing the Fed to take its foot off the monetary policy tightening pedal, Moya added.
"We need to see inflation decline. The Fed has a balancing act to worry about. It can't take rates to 5% or much higher without feeling a lot of pain. The fear is that they will be overly aggressive, so the Fed will try to push back on that."