- Fed speakers indicate third straight 75 basis point hike a given
- Fed hawkish mood reaches new heights after latest jobs, consumer data
- Gold longs need to avoid dropping below $1,708 at all costs
There are exactly three weeks before the Federal Reserve’s next rate hike. Gold longs, already staring at a fifth month of losses as August trading ends today, would want to pray they don’t breach the next red line for the yellow metal at $1,708.
Since the post-Ukraine invasion highs that brought gold to a near record peak of above $2,070, an incredible $345, or 18%, of long value has been wiped off the market.
Yet, what’s intriguing is that it’s been a slow crumble.
Charts by SKCharting.com, with data powered by Investing.com
It has been an unusually dreary period for gold. But it isn’t in full meltdown mode—not yet, thanks to conflicting US data that was released each time the yellow metal neared critical breaking point over the past three months.
This is what has kept bullion bobbing between $1,800 and $1,700 since May, after clearly departing from the $2,000 and $1,900 zones.
Now though, the bearish pressure in gold is accelerating—especially after the latest US jobs and consumer data that suggested the average American’s finances were still pretty solid to keep inflation bubbling.
While Americans feared a deeper recession from interest rate hikes, consumer confidence still rose in August from a three-month decline, according to The Conference Board which monitors economic data tracked and published by public and private corporations.
US job openings, meanwhile, grew by half a million to 11.2 million in July from June, with almost two vacancies for every unemployed person, the Labor Department said.
Such upbeat data, of course, does not warrant any compromise either in the heightened hawkish course the Fed has been on since June.
Since the tone-setting address of Chairman Jerome Powell at the central bank’s Jackson Hole, Wyoming symposium on August 26, nearly every Fed speaker with or without a vote on the Federal Open Market Committee (FOMC) has signaled a third straight 75 basis point (bp) rate hike on September 21.
Investing.com’s Fed Rate Monitor Tool itself assigns a 67% probability for a 75 bp hike when the FOMC meets in three weeks.
And there’s more to come, says Ed Moya, analyst at online broker OANDA, who is pricing in “a half-point in November and a 25 bp increase in December.”
Adds Moya:
”Over the next few months, if the labor market doesn't break and the consumer remains resilient, Wall Street might start pricing in rate hikes for February and March.”
What’s really a conundrum for investors is the peculiar situation the US economy is in. Interest rates are being hiked when the United States is at the crossroads of high inflation and the beginning of a recession.
The dollar and bonds have become the safe haven gold is ought to be, throwing the yellow metal at the bears.
Some are pointing to the potential for stagflation. But with employment being as strong as it is with thriving demand, that seems unlikely even if inflation stays persistently high. In summation, there is no easy precedent for the current situation to compare with, especially given that each economic cycle is dynamically different from the other.
US inflation itself has been running at around four-decade highs since late last year, although the closely-watched Consumer Price Index slowed to an annualized rate of 8.5% in July from a peak of 9.1% in June.
The Fed’s target for inflation is a mere 2% a year and it has vowed to raise interest rates as much as necessary to achieve that.
James Stanley, who blogs on gold at the Daily FX trading platform, noted that gold has been range-bound since topping out at above $2,100 two years ago.
Range support has held three significant tests already, most recently in mid-July, he noted, adding:
“Given the fundamental backdrop, with Chair Powell making a more-forceful push towards policy tightening with the messaging at Jackson Hole, it would seem there to be fundamental potential for bearish continuation in gold. Higher rates mean a higher opportunity cost of capital and this can be a constraint for gold.”
“The bigger question is whether this is the episode that can produce a breach of the support zone that’s held for the past two years, inside of the $1,700 psychological level and around that $1,673-$1,680 zone on the chart.”
So back to the pivotal question: What is the trigger that gold longs have to avoid at all costs, in order not to descend into $1,600 territory?
According to Sunil Kumar Dixit at SKCharting, who tracks the spot price of gold, that would be $1,708.
“If $1,708 falls, bears will aim for a revisit to value zone $1,680.”
“Gold bulls need to overcome $1,730-$1,740, initially followed by $1,755 for a convincing revival to reach the much awaited $1,777-$1,783.”
“Any minor recovery towards $1,730-$1,735 is likely to be hunted down again and the next drop will look to explore $1,708 again.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.