The rally in the U.S. dollar and higher U.S. bond yields have proven too much for the gold market as prices look to end the week at a 6.5 month low, and there could be more weakness to come as the U.S. central bank maintains its restrictive monetary policy for the foreseeable future.
It is a trifecta of weakness for gold as the precious metal sees lower prices for the month, the quarter, and the week. December gold futures last traded at $1,865.40 an ounce, down roughly 4% from last Friday. The yellow metal is seeing its worst week since June 2021.
At the same time, gold is seeing its worst monthly losses since February, which represents the low for the year so far. In the last three months, gold prices have lost 3.3%.
Gold's selloff came as U.S. 10-year bond yields pushed to their highest level since October 2007, above 4.6%. Meanwhile, the U.S. dollar index rallied above 106 points, hitting its highest since late November.
"Gold has been holding up fairly well, but investors are now coming to grips with the fact that the Fed is not going to lower interest rates anytime soon. Higher rates are here to stay; because of this, gold got smacked," said Kevin Grady, president of Phoenix Futures and Options.
Although gold prices have seen significant losses this past week, some analysts expect that prices have room to fall further and have highlighted the year's lows just above $1,800 an ounce as the next major target to watch for.
"Bears are clearly in a position of power with the path of least resistance pointing south. However, the Relative Strength Index (RSI) on the daily charts is signaling that prices are heavily oversold, suggesting a potential pullback down the road," said Lukman Otunuga, manager of market analysis at FXTM. "Looking at the technical picture, a breakdown below $1857.5 may open a path toward $1830 and $1810, respectively. Should prices happen to push back above $1857.5, this could trigger an incline back towards $1885."
Alex Kuptsikevich, senior market analyst at FxPro, said that he is also watching support at $1,800 as gold's selloff has created a bearish technical signal as the 50-day moving average crossed below the 200-day moving average; the pattern is referred to as a "death cross."
"While Wednesday's move in gold was impressive, history suggests that this is unlikely to be the final leg of the decline. The case of the previous death cross in July 2022 is very similar to the current one. And back then, the price was down 7%. Even earlier, in February 2021, the sell-off stopped after only a 9% drop; in August of the same year, it was down almost 7%," he said. "It is essential to note that the $1800 area may become where only some bearish gold positions are fixed. It will be necessary to monitor financial market sentiment very closely. With equity indices continuing to fall and long-term yields rising, a further price fall is quite realistic."
While the gold market has definitely been caught on the back foot, Otunuga added that investors should brace for some volatility next week as the markets will receive important employment data for August.
Along with major economic data, investors will have to navigate a government shutdown as last-minute efforts to fund the government have failed.
Earlier in the week, rating agency Moody's said that a government shutdown, as Congress has been unable to pass any funding bills, could threaten the nation's sovereign debt rating.
"A shutdown would be credit negative for the US sovereign," Moody's said in its report.
"In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability."
Gold could be carving out a base
Jeffrey Christian, managing director at CPM Group, noted that gold's current selloff makes sense as not only are bond yields rising, but the long-end of the yield curve has risen at a faster pace than the short-end, narrowing the inverted spread.
Christian said that this rise in the 10-year highlights improving market sentiment regarding the U.S. economy. However, he added that while recession fears have eased, they have not disappeared. Christian said that his firm's base case is that the U.S. economy will weaken next year into 2025.
"Overall, the economy is holding up really well, so investors don't see any reason to hold gold right now," he said. "However, we still expect to see a recession next year. There are still a lot of risks overhanging the economy that will have to come home to roost. We expect that gold will be building a new base at current prices."
Christopher Vecchio, head of futures and forex at Tastylive.com, said that despite this past week's selloff, he still sees the precious metal has put in a higher floor from last year.
"The move we have seen in bond yields and the rally in the U.S. dollar, gold prices should be closer to $1,700 an ounce," he said.
Vecchio added that investors should not be surprised if gold prices fall back to $1,800 an ounce. However, he also noted that with the Federal Reserve close to ending its cycling cycle and the economy starting to slow, any weakness in gold should be seen as a long-term buying opportunity.
Source: kitco.com
BDST: 1244 HRS, SEP 30, 2023
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