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Surging momentum in U.S. dollar support gold bears and lower prices next week

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(Kitco News) - The U.S. dollar's unrelenting rally to 20-year highs is taking its toll on the gold market as prices prepare to end the week near their lowest point since April 2020.

The greenback's extraordinary momentum and rising bond yields have shifted sentiment among Wall Street analysts to the bearish side. At the same time, retail investors are slightly more optimistic that prices can push higher next week, according to the latest Kitco News Weekly Gold Survey.

This week, a total of 19 market professionals took part in Kitco News' Wall Street survey. Ten analysts, or 53%, said they were bearish on gold next week. At the same time, six analysts, or 32%, said they expect higher prices in the near term and three, or 16%, neutral on the precious metal.

On the retail side, 963 respondents took part in online polls. A total of469 voters, or 49%, called for gold to rise. Another 341, or 35%, predicted gold would fall. The remaining 153 voters, or 16%, called for a sideways market.

Sentiment among retail investors has improved from the previous week as bearish sentiment has a slight advantage. December gold futures last traded at $1,655.70 an ounce, down nearly 1.7% from last week.

Kitco Gold Survey

Wall Street

Bullish
Bearish
Neutral

VS

Main Street

Bullish
Bearish
Neutral

It has been a volatile week for the gold market as the precious metal managed to hold critical support levels even after the Federal Reserve raised interest rates by 75 basis points and signaled that the Fed Funds rate could peak above 4.5% next year.

Many analysts said that gold has been able to withstand the U.S. central bank's aggressive monetary policy stance as the threat of a recession continues to grow. Federal Reserve Chair Jerome Powell said he didn't know if the central bank's action will push the U.S. economy into a recession, but he added that consumers should expect to see some pain as lower growth is needed to cool inflation.

Analysts said that the threat of a recession created some initial safe-haven demand for gold. However, that sentiment has been overwhelmed by volatility in global currency markets as the British pound saw the biggest price drop since 2016, when the nation voted to leave the European Union.

The selloff was triggered after Chancellor Kwasi Kwarteng revealed the government's new budget with spending commitments ranging between £36 to £45 billion in the next four fiscal years. The massive spending initiative will be paid for with new debt.

"Today's announcement shows that right now, the U.S. dollar is the only game in town and this will continue to make it difficult for the U.S. dollar," said Phillip Streible, chief market strategist at Blue Line Futures.


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It's not just gold; analysts note the U.S. dollar's dominance can be felt in the broad-based selloff throughout the commodity sector.

Although there is still some optimism in the marketplace as many see gold as oversold at current levels, many of the bulls see any rally as a short-term correction.

"We are bound to see a correction in bonds with 10-year yields up 33 bp in just one week while the dollar, sharply higher, is toying with the overbought territory," said Ole Hansen, head of commodity strategy at Saxo Bank.

Although Hansen is bullish on gold in the near term, he added, "There will be no prolonged recovery until we reach peak hawkishness, potentially still a few months away."

Marc Chandler, managing director at Bannockburn Global Forex, said he sees a short-term bounce as bond yields consolidate. However, he added that he is watching to see if support at $1,650 can hold.

"A break of that can see $1600-$1620," he said. "It may be too early to think a significant low in place in gold."

Many analysts are bearish on gold as they expect the U.S. dollar can still move higher.

"Friday saw the greenback post its highest mark since May 2002 despite being sharply overbought from a technical point of view. If the dollar pulls back next week, gold could rally," said Darin Newsome, president of Darin Newsom Analysis. "But until that happens, I'll continue to follow Newton's First Law of Motion applied to markets: A trending market will stay in that trend until acted upon by an outside force. And for now, the trend of the dollar is up and gold is down."

Colin Cieszynski, chief market strategist at SIA Wealth Management, said he is bearish on gold as the precious metal has seen some significant technical damage.

"As much as I think USD is getting overbought and due for a correction, gold not only broke down below $1,680, it also dropped under its 200-day moving average, and those are just too technically significant and bearish to ignore," he said.

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