Gold Survives Bears' Mauling Despite Spot Price’s Break of $1,700 Support

By Barani Krishnan

Investing.com -- It certainly isn’t the last straw on inflation and the camel’s back isn’t broken yet, so to speak. Gold’s brief tumble beneath $1,700 support on Tuesday wasn’t the hair-rising event as it was a month ago, with bears keeping the powder dry until next week’s Fed rate decision.

The benchmark gold futures contract on New York’s Comex, December, settled down $23.20, or 1.3.%, at $1,717.40 per ounce, rolling back the near $20 or more than 1% gain in the previous two sessions after another surprising inflation read for August.

The session low for December gold was $1,706.95 after the Consumer Price Index showed an annualized growth of 8.3% for August, above the 8.1% forecast by economists.

The spot price of bullion, which is more closely followed than futures by some traders, bore the bigger impact of the day in terms of support after the CPI data bumped up the dollar.

The Dollar Index, which pits itself against six major currencies led by the euro, hit an intraday high of 109.49, rising for the first time in five sessions, bolstered by the CPI data and the more hawkish interest rate expectations that spawned.

Gold’s spot price was down $22.36, or 1.3%, to $1,702.36 by 15:50 ET (19:50 GMT). It broke below $1,700, reaching an intraday bottom of $1,697.12.

With the Fed’s nominal progress against inflation in August, economists said they expected the central bank to resort to another substantial rate hike this month.

The Fed has raised rates by 225 basis points in four increases since March, with two back-to-back 75 basis point hikes in June and July. Money market traders expect a third 75-basis point increase when the central bank meets on September 21 to decide on rates.

“A high CPI print raised the odds of a higher-for-longer [rates] scenario at the Federal Reserve,” economist Adam Button said in a comment posted on the Forex Live forum.

The Fed’s target for inflation is a mere 2% a year and it has vowed to raise interest rates as much as necessary to achieve that.

“Gold got crushed after a scorching inflation report completely reset investor expectations on when the Fed will wrap up their tightening cycle,” said Ed Moya, analyst at online trading platform OANDA.

“Wall Street is convinced that the Fed will deliver a 75bp rate hike later in the month and probably will start to price another massive hike in November, which means the downward shift to a half-point hike might have to wait till the December meeting. The playbook for a lot of traders was that the Fed would be done with raising rates in December but that probably won’t be how things play out as inflation remains hot.”

Economists have cautioned that the Fed could end up pushing the United States into a deep recession with its sharpest rate hikes in four decades, saying the high-flying housing sector and one-time ebullient stock market could end up as the Fed’s victims.

Preliminary estimates show the U.S. gross domestic product, or GDP, likely contracted by 0.6% in the second quarter after a 1.6% slowdown in the first quarter. Two straight quarters of GDP growth typically places an economy in a recession.

“We are nowhere near pricing in peak Fed tightening and that means this could be a rough patch for gold,” added Moya. “If gold breaks below $1700, not much support is there until the $1,650 region.”

Sunil Kumar Dixit, chief technical strategist at SKCharting.com, agreed, saying gold remained vulnerable to a downside of $1,675-$1,670 till the Fed rate hike was out of the way. “From there though, there’s a high probability that the uptrend will resume towards $1,800.”