The gold market while off its lows took a big hit Wednesday afternoon after the Federal Reserve signaled that it was not ready to cap interest rates anytime soon.
Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment,” read the minutes of the U.S. central bank’s July monetary policy meeting.
The gold market had been under significant selling pressure for most of Wednesday ’s session and gave up all the gains of the last two days after the minutes were released.
December gold futures last traded at $1,945.1 an ounce, down 3.38% on the day.
The minutes caused both the U.S. dollar and bond yields to push higher, adding extra fuel to gold ’s selloff. The U.S. dollar last traded at 92.91, up 0.78% on the day. Meanwhile the yield on 10-year U.S. notes last traded at 67 basis points up more than 1% on the day.
“The gold market clearly wants to see yield curve control,” said Adam Button, chief currency strategist at Forexlive.com. “I think this selling is a little over done but clearly the markets have a gun to the Fed ’s head. They don ’t want to hear anything but printing presses.”
Although gold has dropped sharply Wednesday, Button added that he doesn ’t think the minutes are a game changer for the precious metals market. He added that time and time again the Federal Reserve has shown it will do whatever it takes to support the U.S. economy.
Button also said that the drop in gold could create another buying opportunity for investors waiting on the sidelines.
While gold ’s selloff Wednesday has been more dramatic than some analysts have expected, many have been expecting the market to enter a consolidation period after it unprecedented run so far this year.
Despite the selling pressure, many analysts have said that gold is still in an uptrend.
“Less than two weeks ago, the yellow metal set a record high, so the broader bullish trend is still intact,” said David Madden, senior market analyst at CMC Markets.
Daniel Ghali, commodity strategist at TD Securities, said momentum and speculative interest has been pushing gold prices higher and the question investors have to ask themselves is how long this trend can last?
“I think this market still has a bit of momentum but it ’s close to the top,” he said. “The rubber band is really being stretched to the limit and some point it ’s going to give and then we will see some pain.”
Ghali added that while there is the potential for a sharp position squeeze in the gold market the question is what happens afterwards.
After some short-term volatility, Ghali said that they expect to see gold prices push higher.
“Fundamentally, interest rates are not going higher and there will still be a lot of economic uncertainty,” he said. “Gold ’s long-term bullish narrative hasn ’t changed and is still compelling just not at any price.”