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Gold market could be in trouble; bearish sentiment is rising as prices test critical support around $1,675

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(Kitco News) - The gold market could be in trouble as prices test critical support levels after falling to their lowest level in more than two years.

Along with the drop in gold, sentiment among Wall Street analysts and retail investors has turned bearish, highlighting the risks of lower prices in the near term.

Gold's selloff this past week is a continuation of the trend that started in early March as markets react to the Federal Reserve's aggressive monetary policy action to cool down inflation, which remains stubbornly high.

Markets have all but fully discounted a 75-basis point hike next week following the Federal Reserve's monetary policy meeting; however, surprisingly resilient inflation in August -- with the U.S. Consumer Price Index rising to 8.3%, versus an expected rise of 8.1% -- prompted markets to price in a slight chance of a full 1% move.

The growing hawkish expectations have supported the U.S. dollar near its 20-year highs and have pushed 10-year bond yields to 3.5%, its highest level since April 2011.

In this environment, many analysts have said a lot of technical damage has been inflicted on gold prices and it will be difficult for the precious metal to find any bullish momentum in the near term.

"Gold's selloff is overdone, but assets generally do not recover rapidly from such declines. So in the near term, we can expect more weakness," said Adrian Day, president of Adrian Day Asset Management.

This week, a total of 22 market professionals took part in Kitco News' Wall Street survey. Fourteen analysts, or 63%, said they were bearish on gold next week. At the same time four analysts apiece, or 18%, were bullish or neutral on gold in the near term.

On the retail side, 1,045 respondents took part in online polls. A total of 395 voters, or 38%, called for gold to rise. Another 489, or 47%, predicted gold would fall. The remaining 161 voters, or 15%, called for a sideways market.

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The bearish sentiment comes as the gold price fell to a more than two-year low at $1,661.90 an ounce. The precious metal last traded at $1,684.30 an ounce, down roughly 2.5% from last Friday.

While sentiment is clearly bearish, the question is just how far can gold prices fall, as many analysts note that $1,675 represents a significant support level. According to analysts, a drop below this level would signal an end to gold's three-year uptrend.

Some analysts do see some initial support around $1,650. However, Colin Cieszynski, chief market strategist at SIA Wealth Management Inc, said there is little support for gold until $1,550 an ounce.

Marc Chandler, managing director at Bannockburn Global Forex, said his next gold price target is $1,615 to $1,650 and wouldn't rule out prices falling to $1,500 by next year.

Société Générale sees gold prices falling to $1,550 in 2023 and recovering to $1,900 by 2024

While it is unlikely the Fed will raise interest rates by 1% next week, markets still see further aggressive action through the rest of the year. Chandler noted that markets now see the terminal rate for the Fed Funds rate at 4.50%.

"Risk assets are coming off," he said. "Gold is acting like a risk asset and should be treated as such. Leave aside safe-haven and inflation hedge narratives."

However, not everyone is bearish on gold. Ole Hansen, head of commodity strategy at Saxo Bank, said that gold's ability to end the week above $1,680 could signal a strong move building in the marketplace.

Hansen added that the Fed's move to raise interest rates by 75 basis points could provide a bit of a relief rally in gold.

"I am also wondering how much further stocks need to fall before the stagflation begins to attract some attention," he said.

Michael Moor, founder of Moor Analytics, said that gold's selloff could be reaching an exhaustion point. However, he added that he needs to see a solid close above $1,687 an ounce.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.