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Gold could fall to $1,850 and then $1,800 after breaking below August lows
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(Kitco News) - The headwinds from persistent strength in the U.S. dollar and 10-year bond yields over 4.5% have proved too much for the gold market as prices fall to their lowest level since March.
According to some analysts, the bearish momentum in gold could push prices back down to their 2023 lows at $1,810 in the spot market. Spot gold last traded at $1,873.32 an ounce, down 1.43% on the day.
"This move has had a lot of velocity ever since the FOMC rate decision," said James Stanley, senior market strategist at Forex.com.
The selloff picked up momentum on Tuesday after prices broke below the August lows at $1,885. Stanley added that while the March lows could now be a target, he see some initial resistance around $1,850 an ounce.
Analysts note that gold's selloff comes after the Federal Reserve signaled that it expects to maintain a restrictive monetary policy for the foreseeable future even as its tightening cycle comes to an end. The U.S. central bank's aggressive stance has pushed bond yields to fresh 16-year highs and the U.S. dollar to its highest level since November.
"To me, the direction of the dollar and US interest rates are often near- medium-term drivers, or at least understandable through that lens," said Marc Chandler, managing director at Bannockburn Global Foreign Exchange. "Simply put, the dollar's strength, underpinned by rising rates, which reflects the resilience of the US economy and the dramatic increase of supply, as well as hedging or liquidation by others, has sapped gold's earlier strength. Many thought that the higher inflation would support gold, but higher inflation has meant higher interest rates, which make the non-interest-bearing metal somewhat less precious."
Chandler said he is also looking for gold to slip to $1,840 as the precious metal falls below last month's support.
"A word of caution comes from the Bollinger Band, where gold is trading below the lower band (~$1895), suggesting stretched downside momentum. A move above $1920 may stabilize the technical tone," he said.
Edward Moya, senior market strategist at OANDA, said that Europe's weakening economy is also a significant factor in the U.S. dollar index's latest run above 106 points. He added that it will be difficult for traders to dethrone the greenback as the U.S. economy remains reasonably resilient compared to other countries.
"Gold could be vulnerable to further technical selling now that Wall Street keeps on seeing a strong dollar, higher real yields, and resilient economic data points that support the case for more Fed tightening," he said.
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Gold remains well supported as potential credit risk events drive safe-haven demand - MarketVector's Joy Yang |
Although gold remains under near-term pressure, some analysts maintain their long-term bullish outlook on the precious metal.
Ole Hansen, head of commodity strategy at Saxo Bank, said that gold would need to see a decisive break below $1,800 an ounce before its fundamental outlook changes.
He added that rising energy prices coupled with slower economic growth are creating a stagflationary environment, which he expects will eventually push gold prices back above $2,000 an ounce.
Phillip Streible, chief market strategist at Blue Line Futures, said that he is starting to buy gold after the drop below the August lows. He added that while gold prices still have room to move lower, investors shouldn't ignore the long-term value in the marketplace.
"Now is the time to get gold because it's on sale. It's like going to a grocery store and seeing soup on sale; that is the time to buy," he said. "You don't go all in, but you can start building your position."
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