Gold seen losing tug of war with greenback

Published Mon, Sep 19, 2022 · 05:50 AM
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Avtar Sandu

THE yellow metal started its 6th straight month in the red in September 2022 and erased its inflation-driven gains from earlier this year despite nearing all-time highs in March. 

There is a tug of war going on between the bullion and the dollar. It is a war that the greenback seems to be winning as investors try to digest the Fed’s outlook after the Jackson Hole Symposium, and decipher future rate hikes after the hotter-than-expected United States Consumer Price Index of 8.3 per cent.

The chain of sharp rate hikes by the Federal Reserve has critically dented gold prices in the past few months as market participants sought better yields from US Treasuries and the dollar. With the Fed being on-course with its hawkish stance, the drift is expected to continue in the near term as the Fed’s target inflation figures continue to be out of reach. 

A volatile uptrend for the greenback can be witnessed as another rate hike to tame inflation is expected with the US central bank set to meet on Sep 21. The recent jump in inflation numbers, though small, has significantly crushed investor sentiment regarding the softening of the Fed’s hawkish stance anytime soon. 

Gold prices have been hovering above US$1,700 since June 2020. A convincing break below the US$1,700 support would take it to the next strong support at US$1,450 an ounce. A break below US$1,700 would also see a huge amount of long liquidation in gold. Gold bulls have seen the US$1,700 level as a buying opportunity, but this time it may be different with the Fed determined to continue increasing rates to tame inflation.

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The past week’s data show CPI figures continue to remain pinned near 40-year highs in the US. This has weighed down on investors’ perception of gold as being a safe haven asset as market players shift interest towards the dollar and Treasury yields instead. To reinforce its standing as a safe haven asset, gold needs to clear the 50-day Moving Average zone of US$1,750- US$1,760 before it can swing towards the 100-day Moving Average support of US$1,821.

The August 2022 CPI report revealed that inflation has a stickier than expected grip on the US and other economies. This has resulted in central banks hiking interest rates and exacerbating a brutal drop in financial markets for almost all asset classes including gold. It is noteworthy that Comex gold’s December contract once more visited the support at a low of US$1,706 an ounce on Sep 13, 2022, but at the time of writing this was breached to test the US$1,700 level again. Gold has been testing this strategic level every few sessions since the start of September, which is historically believed to be an infamous month for closing lower.

Economic forecasters are expecting a 75 basis point hike from the FOMC meeting scheduled this week. However, market whispers of a whopping 1 per cent rate hike have started to circulate. Gold is expected to hover around US$1,690 to US$1,710 unless there are extremely hawkish developments by the Fed this week.

The writer is senior commodities manager at Phillip Nova

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