(Kitco News) Gold, both in U.S. dollar terms and in British pounds, was unmoved by the resignation of U.K. Prime Minister Liz Truss following the shortest tenure on record that was filled with extreme volatility. But lack of reaction or not, prices remain at a "critical juncture" and are at risk of another strong selloff, according to gold experts.
After a failed tax-cutting budget that plunged financial markets into chaos over the last several weeks, Truss faced an open revolt within her own Conservative Party.
"We set out a vision for a low-tax, high-growth economy that would take advantage of the freedoms of Brexit," Truss said. "I recognize though, given the situation, I cannot deliver the mandate on which I was elected by the Conservative Party. I have therefore spoken to His Majesty the King to announce that I am resigning as leader of the Conservative Party."
Following the announcement, spot gold priced in U.S. dollars was largely unchanged and later climbed 0.72% on the day to $1,641.60 an ounce. Spot gold in British pounds was also unchanged, but it failed to move higher, with prices last at £1,451.13, down 0.06% on the day.
The main reason for this lackluster reaction is that markets have already largely priced in the news before it happened, DailyFX strategist Michael Boutros told Kitco News.
"Once we got that first resignation last week, the writing was on the wall," Boutros said, referring to the British finance minister Kwasi Kwarteng's news. "They weren't going to initiate all these new tax relief measures and attempts to help with the energy policy. It was obvious that that wasn't going to play out."
Any sterling-based trade will be open to major volatility, and investors need to acknowledge that before getting in, he added.
Gold is currently at a crossroads, and the subsequent price levels could significantly impact future price action.
"Gold is still at a critical juncture. If this thing cracks the January 2020 high of $1,611, it's a really big problem. If we close below that level, there's really nothing to hold $1,560, even down to $1,500," Boutros pointed out.
Last month, gold came very close to falling below that level, but it managed to turn things around at $1,614 an ounce. "If we close below that, it's game over because the larger position for gold has been a double-top formation. If that formation is true, which entails the 2020 and 2021 high, the measured move is into $1,300. The risk below these levels is really detrimental from a long-term perspective for gold," Boutros warned.
On the top side, gold needs to close above $1,730. "Until we do, we are dancing on the edge of the cliff," he noted.
The good news is that the fundamental backdrop is starting to look better for the precious metal. "We're likely to eventually get a bid under gold. Whether it's going to be the increase in market turmoil, a larger downturn in equities, or a deterioration in the war. It's hard for me to see a continued selloff here," Boutros said.
Also, the U.S. dollar rally is getting exhausted, which is great news for the precious metal struggling under the weight of a strong dollar. "The biggest problem and why we're facing this downdraft in gold is because we continue to see interest rate expectations move higher. Fed funds are now at 5% as the expected terminal rate, up from 4.6%," Boutros added. "The dollar is a little bit exhausted here. The good news is only going to be so good news for the dollar."
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