If these key gold price levels fail, expect accelerated near-term selling – TD Securities

In a Thursday note, TD Securities’ Ryan McKay and Bart Melek wrote that while gold has given up some of its recent gains, it continues to outperform the precious complex in relative terms.

“The yellow metal has been able to hold support in the higher range, even as the market grapples with renewed energy upside and the near-term increase in Fed hike probabilities,” they said. “In the near-term, gold will have an elevated sensitivity to incoming data and headlines, with inflation data the next big catalyst.”

TD Securities highlighted two key support levels which, if breached, could drive accelerated near-term selling.

“CTAs turn modest sellers below $4,367/oz and systematic funds become more prone to heavier selling below $4,300/oz,” the analysts wrote. “However, on a longer-term horizon, the renewed dollar-debasement theme, elevated central bank buying and renewed ETF accumulation offer a strong support base.”

“Strong data and a hawkish Fed may only catalyze relatively modest near-term selling, postponing the timing of the next leg higher, rather than leading to material downside,” they added.

In a detailed analysis published last week, Melek wrote that Fed Chair Kevin Warsh’s hawkish tone at Jackson Hole would likely be a significant headwind for gold in the near term.

“Fed Chairman Kevin Warsh cautioned that inflation is not slowing convincingly and stated that policymakers need to ensure it returns to their 2% target, which he said is firm and fixed,” Melek wrote. “He also stated that financial conditions are not currently restrictive.”

He noted that Warsh claimed “the data was not conducive to bringing the elevated PCE and CPI inflation measures to heel,” with higher energy prices and a still-strong economy suggesting that the essential dynamics driving aggregate prices higher remain in place.

“The market interpreted this as meaning that the U.S. central bank is more likely to pull the trigger on higher policy rates in September and December, a significant shift from expectations prior to Mr. Warsh's speech,” Melek said. “The resulting higher short-term rates and firmer dollar drove gold down by about $125, to $4,470/oz at the time of writing. This is in line with what we have hypothesized would happen over the last few weeks.”

Melek said TD Securities believed gold likely has further to fall in the near term, even if the U.S. dollar remained under pressure.

“We judge that the Fed's firm restatement of its commitment to price stability, and its belief that monetary policy remains the most effective tool for achieving that goal, means that debasement-trade narratives will likely be tuned out for now,” he wrote. “Traders recently drove gold higher following the loosening of financial conditions brought about by the Treasury Department's intervention at the long end of the bond market. As such, the yellow metal is likely to give up some of its recent gains, falling toward the lower end of the recent $4,200-$4,700/oz trading range by year-end. Higher rates at the front end of the curve should offset any improvement in financial conditions stemming from Treasury Department liquidity operations on the long end of the curve.”

Melek said the Fed chair appears to be marginally more hawkish than he was in July. “The economy is holding up relatively well, while inflation remains above target,” he noted. “Markets are now beginning to price in a Fed Funds rate hike in both September and December. However, once inflation stabilizes amid a more balanced oil market and weaker aggregate demand due to higher interest rates, the Fed should have greater confidence to unwind any tightening in order to fulfill its maximum employment mandate, supporting a move toward our Q3 2027 target of $5,350/ oz.”

“Central banks, institutions, and physical retail investors will likely act as catalysts, as they continue to view the yellow metal as an attractive portfolio diversifier and may be looking for better entry points,” he added.

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