Gold Prices Could Drop To These Levels!

Falling energy prices have provided little relief for consumers as the costs of housing and food continue to rise sharply. Thus, inflation proves to be significantly more persistent than originally anticipated. This situation worries investors about gold prices.

More aggressive Fed remains decisive for gold

Markets see the potential for the Federal Reserve to be increasingly aggressive for the rest of the year. The continued threat of inflation creates more volatility in interest rate expectations. Rates are hovering above a critical long-term support level due to a more aggressive Fed. Therefore, it is possible for interest rates to significantly affect gold prices.

Meanwhile, markets were surprised by the warmer-than-expected CPI, which rose 8.3% in August. Interest rate expectations have since risen since Tuesday. According to the CME FedWatch Tool, markets are now pricing in more than a 30% probability that the Fed will raise interest rates by 100 bps. Last week, investors were still debating whether the Fed would raise rates by 50 or 75 bps. SIA chief market strategist Colin Cieszynski comments:

Inflation data shows the Fed is clearly far behind the curve. Therefore, the Fed has a very good chance to move 1% next week to show markets that it is taking inflation seriously. The data shows that inflation isn’t just high prices on a few commodities, it’s becoming broad-based, the Fed’s biggest fear.

Rising hawkish expectations do not bode well for gold prices

The precious metal fell more than 1% after higher-than-expected CPI figures on Tuesday. Thus, it retested the support at $1,700. Also, December gold futures remain under pressure. Rising interest rate expectations hover above critical long-term support. Analysts point out that this will signal further weakness for gold prices. Kitco senior technical analyst Jim Wyckoff points out this level:

The bulls need to defend $1,686.30 in October gold futures, the summer low. A drop below this level will cause serious damage to the chart. It also triggers sell stops to lower prices significantly.

Colin Cieszynski says it is following support between $1,680 and $1,675. He adds that if this support area is broken, there won’t be much to stop prices from falling to $1,550.

Many analysts state that a break below $1,675 would signal the end of the three-year bull market of gold. Unfortunately for gold investors, interest rate concerns go far beyond a single rate hike. Lukman Otunuga, head of market analysis at FXTM, says markets are practically priced in, up 75 basis points in November. At the same time, markets see a terminal rate of 5% by March. In this context, the analyst makes the following statement:

This will exacerbate gold’s woes as the precious metal loses its luster in a high interest rate environment. Speaking of technicals, $1,700 remains a key level of interest, with the least resistance pointing south.

“Other factors may come into play to support gold”

The outlook for gold is rather bleak. However, some analysts see it possible for other factors to come into play to support prices. The US dollar remains at a 20-year high. That’s why many economists point to the rising risk of a global debt crisis in emerging market countries. At the same time, some analysts say that a 1% move could be interpreted as a panic move by the Federal Reserve. They also note that this would be positive for gold and markets could lose faith in the central bank.

Nicky Shiels, head of metals strategy at MKS, says gold could hold $1,700 amid rising interest rates as investors are reluctant to give up a major safe-haven asset. He adds that there are concerns that the Fed will continue to raise interest rates until something breaks in the global economy.

“Probably the dollar will remain strong and gold weak!”

Ole Hansen, head of commodities strategy at Saxo Bank, expects gold prices to hold $1,700. But a lot depends on US interest rates, which are close to 20-year highs. Based on this, the analyst makes the following comment:

A 1% increase next week will bring us closer to the economic limit that could result in gold positivity. Until something breaks on the economic front, the dollar will likely stay strong and gold weak. Until then, it’s possible that gold will struggle. But I remain a bull. Because I believe the market’s assumptions are wrong. Because I think inflation will return to 3%.

“Gold prices will go to $1,650 by the end of the year”

Capital Economics senior economist Andrew Hunter expects the Fed to raise interest rates by 75 bps next week. According to the economist, the FOMC’s new forecasts still signal the end of the tightening cycle. Hunter still expects a sharp drop in inflation. He thinks this will convince the authorities to cut interest rates in the second half of next year.

But Capital Economics predicts rising interest rates and a strong US dollar will push prices to $1,650 by the end of the year. Therefore, he is not optimistic about gold prices this year. The research firm predicts that interest rates will return. Therefore, he is a little more optimistic about gold prices in the second half of 2023.

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