(Kitco News) The gold market is in a “danger zone” as prices move closer to $1,800 an ounce, according to analysts.
Another spike in the US dollar trigged a drop in gold Thursday, with June Comex gold futures touching a low of $1,820.40 an ounce and last trading at $1,822.30, down 1.7% on the day. In the meantime, the US dollar index sourced to a fresh 20-year high, last at 104.80.
Gold has solid support at the $1,800 an ounce level, but a break below could lead to a steeper selloff.
“The dollar has firmly put gold in the danger zone and a break of the $1,800 level could lead to further technical selling,” OANDA senior market analyst Edward Moya. “Gold can’t attract any attention until this move in the dollar ends.”
Gold’s struggle after below the $1,900 an ounce level has coincided with a selloff in the US stock market. Investors have been transitioning to risk-off sentiment on fears around the Federal Reserve’s ability to fight inflation without triggering a recession.
Right now, Treasury yields and the stock market are both declining, which should suggest we are getting close to a capitulation with this de-risking moment on Wall Street. If gold breaks below the $1,800 level, technical selling support could a drop towards $1,750 ,” Moya added.
The broad market selloff is creating a liquidity vacuum, which has also been hurting gold, said strategists at TD Securities.
“Substantial selling flow continues to weigh on the yellow metal at a time when liquidity is scarce,” the strategists said Thursday. “Prices are now struggling to hold onto the bull-market-era defining uptrend in the yellow metal under the pressure of this selling flow… With the Fed telegraphing their every move, positioning analytics are going to be key as the market continuously squeezes participants after bearish sentiment builds.”
Thursday afternoon, markets also digested the US Senate confirming Federal Reserve Chair Jerome Powell for his second term in an 80-19 vote.
The vote showed broad support for Powell after the Federal Reserve decided to raise rates by 50-basis-points in May, the highest hike since 2000.
The markets are currently pricing in a 93% chance of an additional 50-bps hike in June and a 90% chance of another 50-bps hike in July, according to the CME FedWatch Tool.
“Inflation will probably remain higher than before the pandemic because wage costs for example are rising sharply due to the tight labor market,” said Commerzbank analyst Daniel Briesemann. “The Fed thus remains under pressure to raise significantly interest rates. Our economists expect rate hikes of 50 basis points at each of the Fed’s next three meetings. The key rate is likely to reach 3.0% by the end of the year.”
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