All eyes on gold’s long-term support as markets see growing odds that the Fed will hike rates by 1% next week

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(Kitco News) – Inflation is proving to be far more stubborn than initially expected, as falling energy prices offer little relief to consumers who continue to see sharp increases in housing and food costs.

The continued threat of inflation is adding volatility to interest rate expectations as markets see the potential for increasingly aggressive Federal Reserve action later in the year. A more aggressive central bank could have a significant impact on gold as prices hover above a critical long-term support level.

Interest rate expectations have jumped since Tuesday after markets were surprised by higher-than-expected consumer inflation, which rose to 8.3% in August.

According to the CME FedWatch Tool, markets are now pricing in a more than 30% chance that the Federal Reserve will hike rates by as much as 1%. Last week, investors were still debating whether the US Federal Reserve would hike the fed funds rate by 50 or 75 basis points.

“Inflation data shows that the Fed is clearly way behind the curve, so there’s a very good chance the Fed will move 1% next week to show markets they’re taking inflation seriously,” said Colin Cieszynski , Chief Market Strategist at SIA Vermögensverwaltung. “The data shows that inflation is not just higher prices for some commodities, but has developed on a broad basis, which is the Fed’s biggest fear.”

The growing hawkish expectations bode ill for gold. The precious metal fell more than 1% to retest support at $1,700 an ounce after Tuesday’s hotter-than-expected CPI numbers. December gold futures remain under pressure and last traded at $1,712.50 an ounce, down 0.28% on the day.

Analysts are warning that rising interest rate expectations could signal further weakness for gold as it hovers above critical long-term support.

“Bulls need to defend October gold futures from $1,686.30 which is summer low. A drop below this level would cause serious chart damage and trigger sell stops to send prices significantly lower,” said Jim Wyckoff, Senior Technical Analyst at Kitco.com.

Cieszynski said he is observing support between $1,680 and $1,675. He added that if this support area were to be broken there would not be much to stop prices from falling as low as $1,550 an ounce.

Many analysts have noted that a break below $1,675 would signal an end to gold’s three-year bull market.

Unfortunately, interest rate concerns for gold investors extend well beyond a rate hike. Lukman Otunuga, manager of market research at FXTM, said markets were practically pricing in a 75 basis point hike in November. At the same time, markets see a 5% end rate through March.

“This will only compound gold’s woes as the precious metal loses its luster in a high-yield environment. Speaking of technicals, $1,700 remains a key interest rate level with the path of least resistance pointing south,” he said.

Although the outlook for gold is bleak, some analysts have said there are other factors that could come into play to support prices. Many economists have pointed to the growing risk of a sovereign debt crisis in emerging markets as the US dollar lingers at a 20-year high.



At the same time, some analysts have said that a 1% move could be interpreted as a Federal Reserve panic move, which would be positive for gold as markets could lose confidence in the central bank.

Nicky Shiels, Head of Metals Strategy at MKS, said gold could remain around $1,700 amid rising interest rates as investors hesitate to shed a key safe haven asset. She added there are concerns that the Fed will keep raising interest rates until something collapses in the global economy.

Ole Hansen, head of commodity strategy at Saxo Bank, said he expects gold prices to hold $1,700; However, much depends on the US, which is at a 20-year high.

“A 1% hike next week would bring us closer to the economic margin, which could end up being positive for gold,” he said. “The dollar is likely to remain strong and gold weak until something collapses on the economic front. Up to this point gold may be struggling but I remain a bull as I believe the market is wrong in its assumption that inflation will return to 3%.”

Andrew Hunter, chief US economist at Capital Economics, said in a report Wednesday that he still expects the Federal Reserve to hike interest rates by 75 basis points next week.

“The FOMC’s new forecasts are still likely to signal that the end of the tightening cycle is in sight, and we still expect a sharp drop in inflation will eventually convince officials to start cutting rates in the second half of next year “, he said .

However, Capital Economics is not optimistic on gold prices this year, as they expect rising interest rates and a strong US dollar to push prices to $1,650 an ounce by the end of the year.

The UK research firm is slightly more bullish on gold in the second half of 2023 as it expects interest rates to start falling again.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of the author Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not an invitation to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article assume no responsibility for any loss and/or damage resulting from the use of this publication.

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