The gold market remains at risk despite its sudden recovery above $1,700 this week. Analysts point to next week’s inflation data as the determining factor between the downward and upward sentiment towards the end of the year.
“We are likely to see more urgent action from central banks”
The yellow metal suffered six consecutive losses between April and September. Later, gold started the fourth quarter on a strong note. The precious metal climbed amid rising risks in financial markets and a possible slowdown in the economy. The negative news has raised stakes for the Federal Reserve’s return from its aggressive tightening cycle. Edward Moya, senior market analyst at OANDA, evaluates the developments as follows:
Some major risk events on the horizon helped gold recover. If the UK faces a one-week time limit on bond purchases, it may have to announce measures over the weekend. The BOJ had to intervene to support the Japanese yen. And we’re likely to see more immediate action from central banks. This shows that global market risks are rising. That’s why you made a lot of bets to support a Fed pivot soon.
“A difficult environment for gold”
But not all macro data agree with this view. Friday’s September jobs report reaffirmed that the employment situation is still strong. Moreover cryptocoin.comshowed that the unemployment rate fell to 3.5%. According to analysts, this is not a level at which the Fed will rush to change its policy. Everett Millman, precious metals specialist at Gainesville Coins, comments:
The report shows that the effects of tighter monetary policy are yet to emerge.
Meanwhile, markets are pricing in a 78% chance of another 75 basis point gain at the November meeting, according to the CME FedWatch Tool. This marks the fourth consecutive increment of this magnitude. Edward Moya explains:
The decline in price pressures is not fast enough. The Fed will continue to be very aggressive with its hawkish rhetoric and this is a difficult environment for gold. We’re going to see gold’s slightly more downside vulnerability here.
“Fed unlikely to return quickly”
Analysts warn that this week’s gold rally will likely reverse if rate hike expectations rise. Everett Millman notes the following for his views on this issue:
This could be a short-lived rally. That’s partly because a lot of investment logic depends on the Fed turning and slowing rate hikes to keep gold right. The basic assumption is that other central banks have already turned. But other central banks will act faster than the Fed. It is unlikely to return quickly as it will hurt the Fed’s credibility.
“In this case, an explosive increase in the price of gold is possible”
As markets continue to digest the latest macro data, it’s important to keep in mind that employment is a lagging indicator. Millman states that it takes between 9 and 18 months for changes in interest rate hikes to filter through the economy. So if inflation begins to cool, the rationale for further rate hikes before they take effect makes it more likely that the Fed will get ahead of itself, according to the analyst. In this context, the analyst says:
The Fed was perhaps more worried than warranted to deal with inflation. For gold, this means some serious weakness in the short term. But by the end of this year or the beginning of next year, an explosive rise in the price of gold is possible if the effects of higher interest rates are filtered out.
Meanwhile, some of the factors supporting gold are geopolitical tensions, including the war in Ukraine, the growing nuclear threat and the energy crisis. Also, the seasonal dynamic works in favor of gold. Millman said, “We have entered the festival season in India. Then it’s wedding season. Also, there is a huge increase in gold imports in Turkey and China,” he says.
It’s all about inflation next week
The September CPI report, which will be released on Thursday, is the main event markets are watching for the week ahead. Any cooling will increase bets around a Fed pivot. This will help gold rise. At the same time, a warmer-than-expected report could herald another discount for the precious metal. Edward Moya comments on the subject:
The market is seeing some real demand destruction as rate hikes work by themselves through the system. There is still a healthy bet predicting the Fed pivot. If inflation is in line or warmer, gold is likely to be in trouble in the short term. But this will likely be the last 75 basis points increase from the Fed. After November, the Fed will try to downshift.
Market consensus forecasts expect the US annual September CPI to decline at 8.1%. CPI increased by 8.3% in August. Core annual inflation (PCE) is expected to rise from 6.3% to 6.5%. Here’s what ING’s chief international economist James Knightley holds:
The lagged effects of the decline in gasoline prices will suppress headline prices. This is also likely to translate into somewhat lower airline fares. However, the core (with food and energy output) component will continue to rise rapidly.
Weekly gold technical analysis
Market analyst Christopher Lewis analyzes the technical outlook for gold as follows. Gold markets initially tried to break towards the $1,750 level, which is a key area. But he withdrew from there to show signs of hesitation. The 200-Week EMA remains something worth paying attention to. Also, he reacted to it. However, it’s about to fall under again. This opens up the possibility of a drop to the $1,680 level. This is an area that has been supported many times over the years. So it was a big deal. Now that you’ve jumped over this, it will be interesting to see how it turns out. Because we are in the middle of a great war on a major level.
If it falls below last week’s hammer, it’s possible that this will create some pretty significant selling pressure. Much of this will depend on the US dollar and how it behaves. This is something you need to be very careful about. More importantly than that, “Will there be an interest rate in America?” If they keep increasing it will continue to create many problems for gold.
At this point in time, it’s a downtrend we’ve been in since the beginning of the year, and it makes certain sense as long as the Federal Reserve looks very tight on monetary policy. We will continue to see gold markets bear the brunt of selling pressure.
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