What is the fair value of gold? Markets reevaluate prices as inflation expectations change

(Kitco News) Gold space has felt the ground shift under its feet this week as the precious metal shed $ 100 on the Federal Reserve’s surprisingly hawkish stance.

Investors are now busy trying to reassess the fair value of gold, with August Comex gold futures trading last at $ 1,771.10, down more than 5 % over the week.

“It was a big downward move, and it rocked a lot of people,” Kevin Grady, president of Phoenix Futures and Options LLC, told Kitco News. “Gold might go up a bit next week. It needs to find its fair value. With everything I’ve seen, $ 1,950 to $ 2,000 isn’t fair value. But I don’t think so either. that $ 1,600 is the fair value. Next week, gold will seek its place. “

And while a drop was widely expected, the scale of the move surprised many analysts.

“We expected a slight drop, but didn’t think it would be so volatile. The precious metals market seems to overreact to these kinds of headlines, with investors paying close attention to the Fed’s wording. And people rushed for the door, “said Walsh Trading co-director John Weyer. “I suspect we’ll see more drop next week.”

The idea that markets will have rate hikes sooner than expected due to higher inflation expectations has been a game-changer for gold, Weyer added.

Blame the Fed?

The Fed’s announcement showed the market that the central bank’s average inflation targeting (AIT) regime is flexible, which has led to a major recalibration, said Cris Weston, head of research at Pepperstone .

“What you see in the USD and the precious metals is a clear assessment of the Fed’s Average Inflation Targeting (AIT) regime. I guess it’s not that the market thinks it is going there. ‘abolish it altogether, but there is certainly some flexibility to that, and it causes volatility in interest rate markets and forces USD shorts – and there are a lot of them – to peg exposures, to its turn, it hurts precious metals, ”Weston said Friday.

Wednesday’s Fed meeting marked a turning point for gold and other inflation hedges, said Nicky Shiels, head of metals strategy at MKS PAMP GROUP.

“Gold has gone from offense to defense after the FOMC, and while it’s still in a bull market that has undergone a strong correction, it is fighting a lot of battles (stronger USD, higher yields, flow (changing stocks, reversal in commodities, outlook for stronger US data). The summer will not be calm, Shiels wrote on Friday. “The path of least resistance is much higher US rates, implying lows higher volatility. “

But gold was struggling even before the Fed’s announcement, failing to make significant gains above the $ 1,900 an ounce level, which was a bad sign, Grady said.

“With all the stimulus, gold couldn’t hit $ 2,500. Gold should have been a lot better in this environment. Instead, gold was muted and struggled. to straighten up, “he said. “And with inflation now rising, the Fed will have to deal with it at some point by talking about raising rates.”

Gold will seek the bottom of this downtrend next week, and after that the precious metal will begin its rally, said Daniel Pavilonis, senior commodities broker at RJO Futures.

“This is another buying opportunity in metals,” Pavilonis told Kitco News. “The US dollar will also top next week, which should help gold. The 10-year yield also collapsed after rising.”

The $ 1,770 level is attractive to enter the gold space, Pavilonis added, noting that strong support levels for next week are $ 1,763 and $ 1,740.

Weyer also listed $ 1,750 as the tech support level. “Gold may come back to $ 1,900, but that will take a lot longer than this week’s decline. The metal needs something to push it higher.”

Longer term, investors may have to prepare for a lower trading range for gold, Grady noted, pointing between $ 1,700 and $ 1,500. “Do I want to be long on gold in an environment where higher interest rates are coming in? As we get closer to the fourth quarter, that’s when you might see gold at $ 1,500 an ounce. “

Powell speaks next week

Next week’s highlight will be Federal Reserve Chairman Jerome Powell’s testimony to Congress on Tuesday. The markets will be very attentive to what Powell has to say and whether or not he tries to reverse this hawkish stance.

“Let’s see if the Fed is ready to adopt a new language on tapering. If opinions converge on tapering from September – not December – the dollar could recover further,” said Chris Turner, global head of tapering. markets and regional research manager. .

Other data on the radar next week includes the Fed’s preferred measure of inflation – the Personal Consumer Expenditure Price Index (PCE), due for release on Friday.

Markets will also watch Thursday’s final Q1 GDP reading, durable goods orders and jobless claims, Wednesday’s new home sales and Tuesday’s existing home sales.

Warning: 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 for informational purposes only. This is not a solicitation to trade in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and / or damage resulting from the use of this publication.

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