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Gold: What Could Happen After Today's Fed Rate Hike

By Barani Krishnan/Investing.comCommoditiesSep 21, 2022 04:48AM ET
www.investing.com/analysis/gold-what-could-happen-after-todays-fed-rate-hike-200630101
Gold: What Could Happen After Today's Fed Rate Hike
By Barani Krishnan/Investing.com   |  Sep 21, 2022 04:48AM ET
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  • Oversold conditions make gold vulnerable to fierce short-covering
  • Supportive buying from lows can start recovery towards $1,680-$1,685 and more
  • Breaching the long-held $1,681 floor of support, the next leg lower is $1,560
  • Dollar Index's resurgence to above 110 makes gold's short-term outlook bearish

Back in June, when we ran a preview like this on the day the US Federal Reserve imposed its first 75 basis point (bp) rate hike in 28 years, we got a pretty varied outcome in futures of gold.

The yellow metal's prices fell just briefly on the Fed decision, before surging higher over the next 24 hours to compensate for what appeared to be an oversold condition. Then, in a way that could only happen with gold, they tumbled almost non-stop over the next 12 days, losing about $100 or nearly 5.5%.

Today, we are on the cusp of what could be the third 75 bp hike in a row, in just over three months from that June decision. Then, gold hovered at around $1,750 an ounce, having lost its $1,800 perch after that Fed decision. Now, after some back-and-forth, the spot price of bullion is almost another $100 lower, hitting a 2½-year low of just beneath $1,660 on Monday.

Spot Gold Daily
Spot Gold Daily

Charts by SKCharting.com with data powered by Investing.com

Many believe things could get worse for gold before it gets better. The main reason for that would be the Fed's determination to not give up its super-hawkish stance on rates until it brings runaway inflation in the United States under control. The central bank’s performance in battling inflation, however, is far from convincing. The Fed's report card is like that of a student the teacher is hopeful will make it someday though isn’t entirely sure about.

Even after the Fed's 75 bp hike in June, inflation, as measured by the Consumer Price Index (CPI), peaked at an annualized of 9.1% that month, marking a new four-decade high (the CPI data is typically lagged by a month, to be sure). Price pressures have come down since, with the CPI slowing to an annualized 8.5% in July and 8.3% in August. But its retreat of 0.8% over two months versus two rate hikes totaling 1.5%—is dismal, to say the least.

Of course, the Fed could keep adding 75 bp increments to its remaining rate decisions for November and December to round out the year with rates ranging at 4.50-4.75%, compared to the zero to 0.25% it began 2022 with. Yet, it's anyone's guess where the CPI could be at that point. An educated guess would put it below 8% for sure, though there is still a good chance it would not be lower than 7.5%.

Spot Gold Weekly
Spot Gold Weekly

The Fed's long-declared goal for inflation is 2%. No one is sure how long it would take for the central bank to get there and if it will even be possible by 2024.

Fed Chair Jerome Powell has, however, said it was imperative that prices be reduced for low-income Americans, and, by that, he means monetary policy must be raised to "a somewhat restrictive level."

Rate hikes aside, the central bank's policy-making Federal Open Market Committee (FOMC) would be accelerating balance sheet reductions from September, cutting tens of billions of dollars it has been spending each month on bond buying to support the once pandemic-ravaged economy.

"Gold's 'September Swoon' could get uglier if the inflation fighting Fed decides not to blink at the risk of sending the economy into a recession," said Ed Moya, analyst at online trading platform OANDA.

"Fed Chair Powell's messaging will likely determine if gold gets crushed here. Gold will be in trouble if Powell is able to convince markets that not only will they remain aggressive with tightening, but that they will hold rates even as the economic downturn worsens. Gold volatility will remain elevated post FOMC as prices will likely have a strong case for either a move towards $1,600 or above the $1,700 level."

Spot Gold Monthly
Spot Gold Monthly

While some of that is looking out in the days, weeks, and months ahead, of immediate concern also is what could happen right after the FOMC rate decision at 14:00 ET (18:00 GMT) today.

Gold lost almost 4% in the seven sessions to Tuesday to remain moored in mid-$1,600 territory. During that stretch, the spot price also hit a 2½-year low beneath $1,654 on Friday.

Much of that happens to gold will, of course, be determined by the performance of the dollar, which is gearing again in the direction of the 20-year highs seen during most of August. If the dollar retreats again after today's rate hike—with bond yields on the US 10-year Treasury in tow—gold could catch a break hereon.

The following are the bull and bear scenarios for gold, that could come right after the Fed decision or imminently, as outlined by SKCharting.com's chief technical strategist Sunil Kumar Dixit:

Bull Scenario

Oversold conditions make gold vulnerable to fierce short covering if critical resistance zones are breached.

There are a few support points sitting as a coalition of $1650-$1640-$1620 en route.

Supportive buying from the lows can start recovery towards the immediate resistance zone of $1,680-$1,685, which helps gold test the next resistance zone of $1,695-$1,705.

A sustained break above this zone puts the 50-Day Exponential Moving Average of $1,726 and the previous week's high of $1735 as a challenge.

A weekly close above the 200-week Simple Moving Average of $1,678 will be an initial sign of rebound to be confirmed by a follow up close above $1,735.

A more convincing structure requires a break below $1,654 followed by a rebound and weekly close above $1,678. Further weekly close above $1,735 would add to the bullish charge towards the broken support-turned-resistance zone of $1765-$1808.

Bear Scenario

Since the time gold bears succeeded in breaching the long-held $1,681 floor of hard support, which corresponds to the 38.2% Fibonacci retracement of the $1,046 to $2,073 upwave, the next leg lower is a 50% Fibonacci retracement at $1,560.

Continuously falling for the sixth consecutive month, gold has limited room for a further correction towards the next major downside of $1,560, before the short-term support of $1,640 and $1,620 come into play.

As the Dollar Index resumes its bullish rebound above 110.20, gold's short-term trend outlook remains under bearish pressure. Though some intraday recovery towards $1,675 may be seen, clusters of resistance are positioned at $1683 and the intraday resistance of $1,695.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

Gold: What Could Happen After Today's Fed Rate Hike
 

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Gold: What Could Happen After Today's Fed Rate Hike

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Comments (12)
Saun Melkon
Saun Melkon Sep 21, 2022 5:25PM ET
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Gold is money according to the US Constitution. Dollars aka Federal Reserve Notes are a CRIME according to the US Constitution. Technically, you are committing an act of treason by transacting in dollar banknotes. Are you happy to be a criminal?
Barani Krishnan
Barani Krishnan Sep 21, 2022 5:25PM ET
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I know a quack if you need one.
Salim Ham
Salim Ham Sep 21, 2022 11:37AM ET
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too confused next leg lower is 1560.....means crash
Tom Scheuermann
Tom Scheuermann Sep 21, 2022 11:33AM ET
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I don't know about gold but last I heard silver was being bought for 5 to $8 above spot. futures markets should just be used by actual participants in the industry, a way for producers to sell their gold and users to buy it. anyone else can buy spot. and no more derivatives. the current system is designed completely for price suppression.
SATHYAMURTHY PS
SATHYAMURTHY PS Sep 21, 2022 10:00AM ET
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Please share your views on silver
SunilKumar Dixit
SunilKumarDixit Sep 21, 2022 10:00AM ET
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Sathyamurthy. Silver has to defend $19.20 and $18.50 support zone in order to retest $20.70 and reclaim higher ground. Rejection from resistance zone would add to correction towards $17.50
Joju Chack
Joju Chack Sep 21, 2022 8:29AM ET
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The writers are really worsening the market
SunilKumar Dixit
SunilKumarDixit Sep 21, 2022 8:29AM ET
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Joju. The markets are always like this. The author will write about various possibilities with logical facts and figures.
prince nduruo
prince nduruo Sep 21, 2022 8:21AM ET
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Looks like a bearish to me. And its heading towards 1531 levels
John Hill
John Hill Sep 21, 2022 6:54AM ET
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What happened to hold being a safe haven, despite strong dollar? Was that way for decades. It's called govt shakedown and power hungry elitists over the avg citizen. Manipulate gold, no meaningful savings rates. just high borrowing rates to keep their sheep in the pen after they have stolen all our savings thru their policies that destroy the middle class.
John Hill
John Hill Sep 21, 2022 6:54AM ET
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gold not hold...
David Addo
David Addo Sep 21, 2022 6:26AM ET
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Atleast i took note of some golden nugget . Thank you Barani
laurent Eliane
laurent Eliane Sep 21, 2022 6:24AM ET
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without manipulation by....gold should soar. even when you receive a 4 oercent and I flatiron is at 8 per ent, which asset you buy? house ? will crash!...bit coin?....or gold as deficit of government will soar again...hammering gold with such a regularity is no a free market.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Sep 21, 2022 6:10AM ET
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“ Dollar Index's resurgence to above 110 makes gold's short-term outlook bearish”. You can go now and see that your system green paper is going up only against the other papers dear writer. While it goes under inflation burn, it won’t make a difference when an egg costs 1$, when one dollar equals to 3€, at such situations I would prefer to carry the egg, because it will stay one egg, while in the near future I will pay 2$ or 6€ To buy the egg. It’s funny how this amazing Stagflation plays ;)
SunilKumar Dixit
SunilKumarDixit Sep 21, 2022 6:10AM ET
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Abdelraziq. Dollar Index breaking above the 110 mark is a technical breakout, whether sustains or not, largely depends on weekly close above the point, and after the impact of today's rate hike. Yes, the parabolic rise in green back is a solo act, one against the rest others in the basket.
Abdelraziq Abuaisha
Abdelraziq Abuaisha Sep 21, 2022 6:10AM ET
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Very true dear Sunil. Still early to judge, but I just wanted to give a hint.
SunilKumar Dixit
SunilKumarDixit Sep 21, 2022 6:10AM ET
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Abdelraziq. I totally agree mate. A lot can happen over the cocktail of events unfolding back to back. Now what if Russian mobilization goes ahead....
EL LA
EL LA Sep 21, 2022 6:10AM ET
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Excellent point!
 
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