Have complacent investors fled the gold market

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(Kitco News) – Once again, the gold market is limping its way into the weekend after seeing a nearly 4% drop, its biggest selloff since May.

There is some hope among gold investors that this selloff has finally shaken out some of the complacent longs lingering in the marketplace. Many have been waiting for this shakeout and are looking to add to their long-term bullish bets.

However, there is also the view that this could be just the start of a bigger move as gold faces some significant headwinds. The biggest hurdle the precious metal faces is that the Federal Reserve will continue to aggressively raise interest rates.

Markets already expected the U.S. central bank to raise the Federal Funds rates by another 75 basis points later this month. These expectations have driven the U.S. dollar to a 20-year high and pushed bond yields back above 3%.

There is not much stopping the Federal Reserve’s firm stance on inflation. Recession fears were eased Friday after the U.S. economy showed that 372,000 jobs were created in June, beating expectations.

Although fears have subsided slightly, they haven’t completely vanished; that won’t stop the central bank from trying to get inflation under control. This week the minutes of the Federal Reserve’s June monetary policy meeting reveal that the Committee sees potential credibility issues on the horizon.

“Many participants judged that a significant risk now facing the Committee was that elevated inflation could become entrenched if the public began to question the resolve of the Committee to adjust the stance of policy as warranted. On this matter, participants stressed that appropriate firming of monetary policy, together with clear and effective communications, would be essential in restoring price stability,” according to minutes.

Another issue that continues to plague the gold market relates to the complacency seen in the futures market. It looks like retail investors are being priced out of the physical market.

Data from the U.S. Mint shows that it sold only 44,000 ounces of gold in June, down 76% from last year. The startling drop comes as bullion demand had been robust through most of the year.

According to some analysts, there is a supply/demand imbalance in the physical market, which is keeping premiums elevated. Analysts have said that lower prices could reset the market.

Finally, as investors keep an eye on bond yields and the U.S. dollar, they should also keep an eye on oil prices. As bad a week gold had, oil saw a steeper decline, briefly dropping below $100 a barrel. Oil has recovered slightly, but if a recession is looming, it will be difficult for the market to hold current prices.

“With crude oil prices trending lower, on recession worries, gold will likely follow — until oil prices stabilize and the downtrend ends. Right now, the fears of recession and lower consumer and commercial demand for metals is trumping the historically bullish aspects of higher inflation being supportive for the metals,” said Jim Wyckoff, senior technical analyst at Kitco.com.