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Gold could retest $1900 amid equity and dollar strength - Walsh Trading's Sean Lusk

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(Kitco News) - While the longer-term outlook for gold remains strong, seasonal factors along with the strength in stocks and the U.S. dollar mean the precious metal could retest $1900 before it goes higher, according to Sean Lusk, co-director of commercial hedging at Walsh Trading.

“From a seasonality perspective, you run higher the second half of summer, with better physical demand,” Lusk told Kitco News on September 1. “We haven't really seen that seasonal bounce until very recently here. Seasonally, you back off a little bit in September after the run-up into the Labor Day weekend. But with everything else going on globally, you have to throw seasonals out the window a little bit.”

From a technical perspective, Lusk noted that gold traded back through some support levels last week, but the jury is still out on whether there's going to be a continuation rally this week.

“I'm not sure how this portends to a potential rally, and follow through over $2000 an ounce,” he said. “I think the market is telling us, it got up to $1980, anywhere near there is going to be met with some psychological resistance again. But technically, it really doesn't matter.”

“10% higher on the year in gold is just above $2000, at $2008, so I think we can achieve that,” he said. “And if we keep going, we can make a run for $2050, $2100.”

Lusk cautioned, however, that with the recent dollar rally, and with stocks putting in a near term bottom, gold could drop again before it rises further. “Higher equities and higher dollars, it's simply going to mean lower gold prices,” he said. “In my view this recent turnaround in gold was due to the stock market being a little on its heels, and therefore, you have the possibility for some further pullback in the metals here, should we continue in that environment.”

“I'm bulled up longer-term, but it doesn't mean we can't swing and retest $1900 at the downside again.”

Lusk is also concerned about the potential impact of the global economy on gold prices. “China is doing everything they can to support their economy,” he said. “While our Fed is raising rates, they're cutting, they're trying to create a more inflationary environment. They're a big producer of gold, but they're also a big consumer. Is there going to be a run of safe haven over in Asia due to that? Will the Chinese economy have ripple effects over there? And if it does, will it have ripple effect on what we're doing here?”

He said much of China’s economic woes are real estate based, and only time will tell if they can right the ship. “Are they going to be buying gold at $2000 an ounce? Probably not,” Lusk said. “I just feel that the path of least resistance, as it stands right now, is still higher, but caution is warranted here because of the uneasiness of these economies that are printing way too much money.”

Fed wants equities lower

Looking at the United States, Lusk said that with the Federal Reserve on track to continue to raise rates, the big question is how they plan to unwind their balance sheet on top of that. “What are they going to have to do to achieve that?” he asked. “The best, most common sense, easiest way is to hurt the stock market a little bit, push it down, step on it, because you’ve got to find a counterparty for the bonds you’re trying to sell.”

“So in that vein, you should get some continued safe haven buying on any longer-term dip. But we’re not seeing that.”

Lusk said that the Fed trying to create a soft landing for the U.S. economy, but this is proving very difficult while Washington continues to print money. “That's the tug of war that's going on right now,” he said. “I think longer term, because of that uneasiness, as we get in the later third quarter and into the fourth quarter, there’s potential for some contagion here, on the fact that the Fed is going to keep going, and they're not going to pause until they take down inflation.”

He said that in this scenario, the big winner shouldn’t be equities, in theory, but they stubbornly continue to rise this year. “I think you have a lot of fund managers who’ve basically got to ride this stuff up,” he said. “They’ve got to buy any dips, they’ve got to continue to press the metal here. But sooner or later comes the realization that rate hikes aren't going away and they're going to matter, because it's going to cost more to do anything.”

Real estate, consumers will suffer

Lusk said the impact of those high rates is already being felt in the real estate sector, with fewer buyers on the residential side and collapsing occupancy rates on the commercial side, particularly in major urban centers.

He also pointed to the rally in energy as another factor that will impact the U.S. consumer. “That's going to hurt discretionary spending, it's going to cost more to do things, it's going to cost more to go out to eat, those things are going to hit home here,” he said. “Once summer ends and we get into the fall, I think some realization is going to come into the marketplace that they're not going to stop raising rates, because they've got a big balance sheet to unwind.”

Lusk said that he expects discretionary spending to tighten as the costs of higher rates filter down to ordinary people entering the winter season. “It's just not all hitting at once, but it’s hitting in order,” he said “It's linear.”

He added that one of the problems facing gold is that only a few people can afford it at these levels. “Are you going to push more into crypto? Or are you going to stay in gold here, in silver?” he asked. “You can understand why, with the equities rallying, and the dollar, the two things that usually create some contagion for gold, that's where we're at here.”

“My bias is higher longer term,” Lusk said. “But I think from the seasonal perspective, we pull back here a little bit.”

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