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(Kitco News) – The gold market is trying to hold on to support around $1,750 an ounce. Analysts are warning investors that prices could drop back to last month’s lows around $1,700 as the U.S. dollar continues to see significant upside momentum.
The U.S. dollar index is trading at 109 points, testing July’s 20-year high. The greenback has pushed solidly above parity with the euro in what analysts have called an unstoppable rally.
As to how much momentum the U.S. dollar has, currency analysts at Brown Brothers Harriman said that a solid break above its 20-year high at 109.24 could lead to a run to 120.
“Can the dollar rally another 10% from current levels? Fundamentally, that seems hard to justify, but stranger things have happened,” the analysts said. “We maintain our strong dollar call. As risk-off impulses ebb, the dollar should continue to benefit from the relatively strong U.S. economic outlook and heightened Fed tightening expectations.”
Monday, currency analysts at TD Bank said that they were taking profits in their short euro trade against the U.S. dollar. However, they added that the euro could have room to fall further against the greenback.
Analysts note that the U.S. dollar is also supported by rising bond yields, with the 10-year yield pushing back above 3%. Analysts also point out that these are two significant headwinds for the precious metal.
The current market environment is taking its toll on gold as it tries to hold critical support levels. December gold futures last traded at $1,751.80 an ounce, up 0.19% on the day.
Analysts note that gold‘s future is entirely in the hands of the Federal Reserve, with markets predicting the U.S. central bank to maintain its aggressive monetary policy stance longer than initially expected.
“The Fed is focusing on inflation. The minutes for the last Fed meeting indicate that, given the scale of the inflation problem, officials intend to raise interest rates to the point where they act as a drag on economic growth. With inflation at 8.5% in July and the Fed funds rate at 2.5%, there is still some way to go,” said precious metals analysts at Heraeus. “If the Fed keeps pushing ahead with rate rises, that could see the dollar appreciate further. The gold price bounced off its July low after the dollar lost some momentum, but if the dollar keeps strengthening, the gold price could slip further.”
Markets are laser-focused on Friday, when Federal Reserve Chair Jerome Powell will give a speech during the annual central bank symposium at Jackson Hole, Wyoming.
“There is no way the Fed will soften its tone while inflation still hangs around the 8.5% level,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a note Tuesday.
Ozkardeskaya added that the strong U.S. dollar and rising bond yields are impacting gold’s role as a safe-haven hedge as equity markets are seeing their worst selloff since June.
“The yellow metal no longer acts like a good hedge against market selloffs; it sinks along with the risk assets instead. For that to reverse, we need the dollar to soften,” she said.
Lukman Otunuga, senior research analyst at FXTM, said there could be a big move on Friday as markets see a 50/50 chance of the Federal Reserve raising interest rates but either 50 or 75 basis points. He said that markets will be looking for some clarity from Powell at Jackson Hole.
“If Powell fortifies expectations around the Fed moving ahead with another jumbo rate hike in September and more tightening ahead, this could boost the dollar. Alternatively, a cautious-sounding Powell that expresses concerns over the U.S. economic outlook may reduce the odds of big rate moves, weakening the dollar,” he said in a note Tuesday.
“If prices are able to breach $1724, a selloff towards $1700 is on the cards. Alternatively, a move back above $1752 may open a path back towards $1770 and $1800, respectively,” Lukman added.
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