The surging greenback is keeping gold on a very tight leash. And with U.S. Treasury Secretary Janet Yellen giving a nod of approval to the dollar rally, more gains could be in store, while gold analysts warn of another significant move down in the short term.
Gold is now stuck below $1,700 an ounce, and there is a growing risk of a drop below $1,600. The main drivers suppressing gold’s price action include the aggressive tightening by the Federal Reserve and the U.S. dollar index trading near 20-year highs. December Comex gold futures were last at $1,675.00, down 0.65% on the day.
On top of the already immense gains of 18% year-to-date, the U.S. dollar advance received a further endorsement from Yellen, who described it as a “logical outcome” in light of what the Fed is doing compared to other central banks.
“A market determined value of the dollar is in America’s interest,” Yellen told CNBC Tuesday. “The currency movements are a logical outcome of different policy stances.”
Yellen was responding to whether U.S. officials needed to intervene to halt the greenback’s move higher. She also described the current U.S. dollar strength as “appropriate.”
Her comment comes amid rising criticism that a strong greenback could have a detrimental impact on emerging economies as financial conditions tighten significantly.
The Federal Reserve has pursued its most aggressive monetary policy tightening since the 1980s this year, raising rates by 300 basis points to the current range of 3% to 3.25%. Markets are pricing in another 75bps hike in November and a 50bps increase in December.
Last week, the United Nations urged the Federal Reserve and other central banks to ease up on rate hikes, warning that tighter monetary policies are pushing the global economy into a recession.
Following Yellen’s comments, the dollar rally continued to gain momentum, with the U.S. dollar index reaching a daily high of above 113.50. This is bad news for the gold price and for the global economy.
“The dollar’s appreciation is bad news for the global economy, as it will weigh further on demand for traded goods and add to global inflationary pressures. It is another reason why we expect the global economy to fall into recession next year, and risks pushing some central banks to hike policy rates further,” said Capital Economics global economist Ariane Curtis.
U.S. President Joe Biden also downplayed recession risks this week, which benefited the greenback. “I don’t think there will be a recession. If it is, it’ll be a very slight recession. That is, we’ll move down slightly,” Biden told CNN Tuesday.
Many analysts foresee the greenback strength lasting into 2023. Capital Economics added that it sees the DXY index climbing another 4% before peaking around the middle of 2023.
For gold, the short-term outlook leans quite bearish as the Fed continues to tighten, forcing other central banks to follow suit, according to analysts.
“The Fed will be the last to blink. As quantitative tightening continues to sap liquidity from global markets, it will increasingly constrain other central banks before it binds the Fed, while pressuring global assets amid tightening monetary policies and a slowing growth outlook. This should support the dollar’s rally, while weighing on gold prices despite rising recession risks,” said commodity strategists at TD Securities.
Their advice to investors is to ignore gold’s siren calls as the precious metal trades below the $1,700 an ounce level and wait until a bottom is established. “A sustained downtrend will likely prevail [in gold], while quantitative tightening continues to drive real rates higher,” the strategists added.
At the end of September, Australia and New Zealand Banking Group (ANZ) noted that a break below $1,675 an ounce could open the door to $1,600.
ANZ’s senior commodity strategist Daniel Hynes and commodity strategist Soni Kumari cited the Fed leaning toward doing too much tightening rather than too little.
“The break below USD1,675/oz suggests the price could fall to USD1,600/oz,” the strategists wrote. “Bears could extend downside price moves to USD1,600/oz and below … Immediate resistance lies at USD1,700/oz, and a break of this level would put the next resistance point at USD1,735/oz. While reversal of the trend could be possible if prices break critical level of USD1,800/oz.”