The gold market could be in trouble;  Bearish sentiment rises as prices test critical support around $1,675

The gold market could be in trouble; Bearish sentiment rises as prices test critical support around $1,675

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(Kitco News) – The gold market could be in trouble as prices test critical support levels after falling to their lowest level in more than two years.

Along with gold’s decline, sentiment among Wall Street analysts and retail investors has turned bearish, underscoring short-term price downside risks.

Last week’s sell-off in gold continued the trend that began in early March as markets reacted to the Federal Reserve’s aggressive monetary policy to quell inflation, which remains stubbornly high.

Markets have almost fully discounted a 75 basis point hike next week after the Federal Reserve’s monetary policy meeting; however, surprisingly resilient inflation in August – with the US consumer price index hitting 8.3%, versus an expected rise of 8.1% – prompted markets to price in a slight chance of a full swing from 1%.

Rising hawkish expectations supported the U.S. dollar near 20-year highs and pushed 10-year bond yields to 3.5%, their highest level since April 2011.

In this environment, many analysts said that a lot of technical damage had been inflicted on gold prices and that it would be difficult for the precious metal to find short-term bullish momentum.

“Gold’s sell-off is overdone, but assets don’t typically recover quickly from such declines. So in the near term, we can expect more weakness,” said Adrian Day, President of Adrian Day Asset. Management.

This week, a total of 22 market professionals took part in Kitco News’ Wall Street survey. Fourteen analysts, or 63%, said they were bearish on gold next week. Meanwhile, four analysts each, or 18%, were either bullish or neutral on gold in the near term.

On the retail side, 1,045 respondents took part in the online surveys. A total of 395 voters, or 38%, called gold higher. Another 489, or 47%, gold predicted would fall. The remaining 161 voters, or 15%, called for a sideways bargain.

The bearish sentiment comes as the price of gold fell to an over-two-year low at $1,661.90 an ounce. The precious metal last traded at $1,684.30 an ounce, down about 2.5% from last Friday.

While the sentiment is clearly bearish, the question is how far gold prices can fall, as many analysts note that $1,675 represents an important support level. Analysts say a drop below this level would signal the end of gold’s three-year uptrend.

Some analysts see initial support around $1,650. However, Colin Cieszynski, chief market strategist at SIA Wealth Management Inc, said there was little support for gold up to $1,550 an ounce.

Marc Chandler, Managing Director of Bannockburn Global Forex, said his next gold price target is $1,615-$1,650 and would not rule out prices falling to $1,500 next year.

Although the Fed is unlikely to raise interest rates by 1% next week, markets still see more aggressive moves throughout the year. Chandler noted that markets now see the terminal rate for the Fed Funds rate at 4.50%.

“Risk assets are coming off,” he said. “Gold acts as a risky asset and should be treated as such. Leave aside the safe haven and inflation hedge narratives.”

However, not everyone is bearish on gold. Ole Hansen, head of commodities strategy at Saxo Bank, said gold’s ability to end the week above $1,680 could signal a strong move in the market.

Hansen added that the Fed’s decision to raise interest rates by 75 basis points could provide some relief for gold.

“I also wonder how much more stocks have to drop before stagflation starts to catch the eye,” he said.

Michael Moor, founder of Moor Analytics, said gold selling could reach a point of exhaustion. However, he added that he needed to see a strong close above $1,687 an ounce.

Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.

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