Gold Closes Below Crucial $1,780 Support; Dollar Rotation May Cause Additional Losses

Is the gold boom finished? On paper, it would appear so, given that a major support for futures of the yellow metal was shattered on Wednesday and a close below $1,780 in New York Comex trading drove down the spot price of gold.

In after-hours trading, however, the benchmark December futures contract recovered to $1,780, and the spot price also reduced losses, indicating that the direction of both will depend on the behavior of the dollar. The U.S. dollar climbed for the third time in four sessions on Wednesday.

Sunil Kumar Dixit, a strategist at SKCharts.com, observed, "Swing traders and speculators appear to be unwinding long bets in gold to prop up the recently falling dollar." The direction of gold will largely depend on whether the dollar's rotational play continues.

Gold for December delivery closed at $1,776.70, a reduction of $13 or 0.7%, adding to the previous two days' loss of 1.4%. The price reached $1,781.50 by 15:30 ET (19:30 GMT).

At that hour, the spot price of bullion, which some dealers monitor more carefully than futures, was $1,766.55.

Prior to last week, gold had gained gradually for four consecutive weeks in a technical rally after hitting a low of $1,696.10 in mid-July.

In the minutes of its July meeting, which were issued on Wednesday, the Federal Reserve warned that US rate hikes could be paused if inflation continues to decline from the four-decade highs reached earlier this year.

"Some participants stated that, once the policy rate reached a sufficiently restrictive level, it would likely be appropriate to retain that level for some time," the Fed noted in the minutes of its July 26-27 meeting, referring to FOMC members.

However, the Fed also indicated that FOMC members were concerned about excessive rate hikes and considered that a pause in rate hikes may be necessary if economic conditions deteriorate.

"Downside risks included the possibility that a further tightening of financial conditions would have a larger negative impact on economic activity than anticipated, as well as the possibility that the Russian invasion of Ukraine and COVID-related lockdowns in China would have larger-than-anticipated effects on economic growth," the central bank added.

The Fed has executed four rate increases since March, pushing essential lending rates from near zero to as high as 2.5% by July.

As measured by the Consumer Price Index or CPI, inflation continues to exceed the annual target of 2% established by the central bank. Through July, the CPI had climbed by 8.5% year-to-date. Prior to that, the CPI rose at the fastest rate in four decades, 9.1% in the twelve months preceding June.

Traders believe that the Fed will raise interest rates by 50 basis points at its next meeting in September, as opposed to the previously anticipated 75 basis point hike.