Gold (XAUUSD) and Silver (XAGUSD), which have been pegged to the US dollar, lost significant value in their market prices, settling at $1,753.04 and $19.33 respectively.
Similarly, the most popular cryptocurrency, Bitcoin, has suffered the same fate as these commodities. Bitcoin prices have been pushed to a week low after reaching above $25K. When the bulls hoped for more gains, a reversal would set in immediately for this risky asset. The decline in these risky assets points to the fact that the bearish season is not yet over, notwithstanding the reduction in the US inflation rate from the CPI report delivered last week.
The hawkish utterances from some Fed members admitting the possibility of a more aggressive interest rate hike by over 75 basis points have pushed back some investors into the risk-on mode leading to the selloffs of their risky assets ahead of the next Fed’s session in September.
Fed President of San Francisco, Mary Daly, pointed out that there is still room to raise the interest rate until inflation is eliminated. She considered it necessary to continue with the current rate in hiking the interest rate to attain the Fed target for fright inflation.
Neel Kashkari – the president of the Minneapolis Federal Reserve Bank, further made a supportive remark that he does not imagine that the country is currently in any recession. Therefore, he believed it is still necessary to tighten the interest rate to contain inflation.
Hiking the interest rate is expected to strengthen the dollar index and discount the prices of these risky assets. This is because significant investment is pulled out of the risky assets and pushed into the US dollar as a safe asset.
The preceding explains why the prices of gold, silver, and Bitcoin have been thrown into a downtrend following the hawkish utterances from the Fed members on the possibility of hiking the interest rate by 50 or 75 basis points during the next Fed session in September.
Since these risky assets mentioned above are all pegged to the US dollar, increasing dollar strength, discounts heavily on other currencies and commodities prices.
The fact that the prices of gold, silver, and Bitcoin have been pegged to the US dollar makes them mutually destructive to each other. Hence, we find that the costs of these assets diminish whenever there is an increase in the dollar index and vice versa.
Investors only turn to these risky assets whenever the inflation rate is high, and the Fed does not consider it necessary to hike the interest rate. Under these circumstances, investors often consider gold, silver, and Bitcoin as a hedge against inflation.
On the contrary, Gold, Silver, and Bitcoin cease being a hedge against inflation whenever the Fed decides to embark on an aggressive interest rate hike due to the high inflation.
How does the dollar index affect Gold, Silver, and Bitcoin
The dollar index with gold, silver, and Bitcoin has been described as mutually destructive financial instruments. This means investors hoped for a massive decline in the prices of these assets whenever the dollar index was on the increase and vice-versa.
On the other hand, Gold, Silver, and Bitcoin can only be expected to recover when the dollar index weakens.
Forecast for Gold, Silver, and Bitcoin
Gold, Silver, and Bitcoin will likely continue the current downward trend as the market returns to the risk-on mode over fears of a more aggressive interest rate hike in September.
Gold is currently sitting on solid support at $1751.5. A break below it could trigger more downside to the next support level at $1,716. However, should the price hold above the current support, we can expect a short retracement up to the resistance level of $1,772.
The overriding sentiment for gold is currently bearish.
Silver, on its part, follows the same trend as gold. The significant support for silver is located at $19.17. This means we can expect more downside for this pair up to this point. A break below this support will trigger more sales up to the next level at $18.74.
On the contrary, should the price sustain its weak support level at $19.3, we can hope for a short retracement before continuing with the downward trend. The overall sentiment for this pair is bearish.
Bitcoin prices are resting on support at $22,700. A break below it could lead to more downside, with the target at $22,400. A break below this could trigger a free fall of up to $20,900. Should the current support hold, we can hope for a short retracement.
However, the overriding Sentiment for Bitcoin is highly bearish.
