Gold continues to fall, Fed hints at rate hike

Spot gold fell for the fifth week in a row, hitting an intraday low of $1,697.53 since the week of August 13, 2021. The U.S. dollar index rose about 1.42%, hitting a nearly 20-year high of 109.3032 since the third quarter of 2002, rising for the third week in a row. Gold prices have struggled so far to gain acceptance below the $1,700 mark. Still, gold was unable to find any meaningful support, suggesting that risks remain skewed to the downside. The recent sell-off may be far from over.

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According to data from the U.S. Commodity Futures Trading Commission (CFTC), as of July 12, the net long position of fund managers in COMEX gold decreased by 24,058 contracts to 2,748 contracts. If gold prices fall below entry levels during the pandemic, pressure to capitulate is building. In a liquidation vacuum, these large positions are the most vulnerable, suggesting that gold still has a further downward bias.

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The U.S. CPI report for June released by the U.S. Bureau of Labor Statistics showed that headline inflation continued to remain high, reaching 9.1% not seen since November 1981, up from 8.6% in May and higher than expected of 8.8%. After the inflation data, traders hinted that the Fed is likely to raise rates by a full percentage point at the July FOMC meeting. After that, the Fed will raise rates by 75 basis points at its next FOMC meeting in September. Although Fed officials have since cooled such expectations.

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Francesco Pesole, currency strategist at ING, said: “The volatility around euro-dollar parity (touched yesterday) should continue to rise and affect other dollar crosses. We believe the current reassessment of Fed rate hike expectations, along with Other factors, which could support the dollar at this stage, and the risk of a more decisive break below 1.000 in EUR/USD, could give the dollar a stronger overall.” Erlam added that a break below $1,700 is still highly likely, with the next support level at each $1680 for an ounce. “(But) once it peaks and we see signs of inflationary pressures subsiding, we may return to gold as the economy slides into recession.”

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Generally speaking, there is a 100% negative correlation between the value of the US dollar and the price of gold. This is because the dollar and gold are paired, so the strength of the dollar and the weakness of gold or the weakness of the dollar and the strength of gold are directly related.

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A sharply accelerated rise in U.S. dollar interest rates would also boost real yields on government debt instruments. Higher yields make gold less attractive because it doesn't have any interest yields, and people turn to this fixed-income asset to stay away. gold. With the US dollar index continuing to climb to near 20-year highs, rising U.S. bond yields and a sell-off in oil (falling commodity prices), downward pressure on gold prices is mounting.