According to analysts, the gold market will continue to be very sensitive to the Federal Reserve’s interest rate outlook. Therefore, even though prices have gained more than $30 during the week, it is too early to call a bullish rally below.
This is a vote of confidence for gold!
The US inflation report for June showed that price pressures increased at the slowest pace in two years. After that, the gold price started to rise. US CPI increased 3% last month from a year ago. The core CPI, which excludes volatile food and energy prices, was 4.8%, below the estimates. Comex gold futures for August delivery firmly held the $1,900 level. Thus, it was last traded at $1,961.70, up just over $30 weekly. Everett Millman, precious metals specialist at Gainesville Coins, evaluates the developments as follows:
Gold holding above $1,900 is a vote of confidence, despite everyone’s expectation that the Fed will raise interest rates in July. The Fed will drive the gold market for the next few months. Higher rates for longer will be negative for the price. Gold’s current response means either that not all rate hikes have been priced in yet, or that market expectations are not in line with reality.
It’s too early to over-buy gold.
The Fed still plans to raise rates at least twice this year. Accordingly, market expectations for the July meeting are pricing in a 25 basis point increase probability of 96%. The second rate hike has not yet been priced in. Therefore, analysts remain cautious about gold in the short term. Bart Melek, head of global commodity strategy at TD Securities, comments:
People want to rally under any weak pretext, including the hope that the Fed will ease quickly and end its tightening program. At this point, it’s too early to go overboard.
This could be a problem for gold!
The inflation rhetoric is starting to look better. However, this is not a done deal, especially given the rise in energy prices. “We have seen a significant increase in oil prices recently as OPEC continues to reduce supply. The huge benefit we derive from cheaper energy may be somewhat reversed in the coming months,” he warns. It is also unlikely that the Fed will be quick to change its hawk rhetoric as it will affect its credibility going forward. Melek says the following about it:
I doubt the Fed will start easing us as quickly as the market thinks. It is possible for the data to surprise upwards. Also, the Fed is likely to stick to its guns. This can also be a problem for gold.
That’s what keeps the gold in place!
Everet Millman says what the Fed will do next is still a big mystery. The analyst notes that it is difficult to predict how some of the lagged effects of such an aggressive monetary policy tightening will affect broader markets. Millman adds that the key question for markets is not how much the Fed will raise interest rates, but how long rates will stay high before the Fed begins cutting rates. Based on this, Millman makes the following statement:
If they cut interest rates at the end of this year or the beginning of next year, the markets will react strongly. It’s important to know what the next step is. How long will interest rates stay high and when will the interest rate cut come? That’s what keeps the gold in place.
Based on previous statements, Millman says the Fed will likely move in the direction of tightening. Therefore, he states that this will mean that interest rates will remain high for a longer period of time. cryptocoin.comAs you follow, US inflation has been hovering above 2% for 18 months. That’s why Fed Chairman Powell believes markets need less than 2% time to stabilize this.
Gold price levels to watch
Bart Melek states that the last move under it was probably short-lived. Therefore, he states that short-term purchases raise prices. Melek said, “This situation will be largely reversed. “It is too early for the rally and there is a significant risk of easing,” he said. Angel adds that close resistance is at $1,966 and $1,970, while support is at $1,930, $1,900 followed by $1,896.
Millman says he’s not yet ready to move into ascension camp. It sees the next major resistance at $1,975-80 and the support at $1,900.
Next week’s data
- Monday: NY Empire State Manufacturing index.
- Tuesday: US retail sales, US industrial production, Fed Supervisory Vice Chairman Barr will speak.
- Wednesday: Housing starts and building permits in the USA.
- Thursday: US jobless claims, Philly Fed manufacturing index, US current home sales.
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