Gold Has Surrendered Below $1910

Gold prices are dropping rapidly since the beginning of the week. They have made 2.5% down already to $1870 per troy ounce, crashing a strong support at $1910-1930 per ounce.

Basic scenario for gold is to drop to $1800-1840 support zone. There is a huge volatility for the yellow metal prices that could mean an elevated turbulence for gold. Gold prices have started to drop right after the meeting of the Federal Reserve (Fed) on September 20. It lost more than 3.0% since then after the monetary watchdog disclosed its hawkish intentions. Investors were disappointed with another possible interest rate hike by 0.25% this year, as they considered the current interest rate hike cycle to be over. Fed members like Governor Michele Bowman and Minneapolis Fed President Neel Kashkari contributed strongly to the anti-inflation choir. The latter has delivered the most exiting comments after he insisted on higher interest rates amid strong U.S. economy. The U.S. economy is heading toward a “high-pressure equilibrium”, according to his new assumptions. Such a condition would involve continued growth featuring strong consumer spending and “the economic flywheel spinning.” He also believes that a U.S. government shutdown or a prolonged strike by workers of the automotive industry may cool the economy down. So the Fed will have to do nothing more to slow it down. “If these downside scenarios hit the US economy, we might then have to do less with our monetary policy to bring inflation back down to 2% because the government shutdown or the auto strike may slow the economy for us,” he said.

This is very controversial but could be easily understood amid galloping debt yields. The U.S. 10-year Treasuries yields rose to 4.64% from 4.45% just in a week, while the S&P 500 broad market index dropped by 4.5% since the Fed meeting, and it continues to go down. Even a hawkish heard would swing in doubts amid such roller-coaster developments. The S&P 500 index recovered some losses on Kashkari words, but the debt yields continue to rise. The 10-year debt yields may advance to 4.75% from the current 4.64%. This is very alarming as it is the highest level since 2007 when the great financial crisis erupted. 

This could be a favorable situation for the safe-haven assets like gold, especially when a government shutdown could appear on October 1. But, this is not exactly the situation as debt yield continue to rise. This is a very bad development for the yellow metal, as gold prices are deteriorating when yields are rising. This logic is confirmed by the capital outflows from SPDR Gold Trust (GLD) that are recorded in the last four weeks. It lost another $285 million during the last week, and may lose more in the month of September compared to $1.4 billion in August. The outflow during the last three weeks was reported at $1.1 billion.

Investors are trying to exit gold positions fast that may lead to a quick decline of gold prices to $1800-1840 per ounce. However, we may see some price correction to retest former support at $1910-1930 per ounce before a huge drop in gold prices. In the worst case scenario prices will drop without any correction straight to the nearest support.