Hawkish Fed surprise could knock down gold price next week

Hawkish Fed surprise could knock down gold price next week

Even though gold is looking to end the week above $1,800 an ounce, there is a high chance for a move lower as the Federal Reserve can still surprise on the hawkish side, according to analysts.

Despite the rally, the precious metal is trading essentially flat on the week, with February Comex gold futures last at $1,815 an ounce.

All eyes are now on the November inflation figure after the Producer Price Index (PPI) rose more than expected.

The CPI print is scheduled to be released on Tuesday, with analysts warning that inflation will likely remain elevated and be slow to decelerate.

"Next week, the CPI is anticipated to trend in the right direction, but it won't come down as quickly as many anticipate. I'm partially bearish on gold next week," OANDA senior market analyst Edward Moya told Kitco News. "Post-Fed, gold could be reeling but then eventually settling higher. Looking at a potential downside for next week, but that will be short-lived."

What to expect from the Fed

The Fed will announce another rate hike on Wednesday, with markets looking for a slower tightening pace of 50 bps versus 75 bps. But a slower pace does not necessarily mean the U.S. central bank is pivoting away from its plan. Fed Chair Jerome Powell has already warned that rates might have to stay higher for longer.

Investors will be paying close attention to the updated dot plot, economic projections, and the language Powell uses during the press conference.

"The new dot plot and new economic forecasts are risk factors for gold. Message from Powell and other Fed speakers has been that the pace of hikes may slow, but we may still see a terminal rate that is somewhat higher," TD Securities commodity strategist Daniel Ghali told Kitco News.

Ghali added that gold has been benefiting from a short-covering rally that is now close to its end. "We've seen a substantial amount of short-covering, which contributed to the rise in gold prices. As the year draws to a close, money managers are reluctant to put on a substantial amount of risk on the table. From this point on, most short covering is now in the rearview, and prices are still at risk of a more hawkish Fed on the horizon," he noted.

How investors interpret the Fed's messaging will also be important, Moya explained. "It will be interesting to see how investors feel about the Fed. Will this be the last hike followed by a pause? You could still make a case that they could go another 50 bps in February. And then, in March, it would be a toss-up. It still seems that more tightening is warranted," he said.

Aside from the macro data, geopolitics might start playing a bigger role for gold again as the war in Ukraine could escalate further, Moya warned.

"That is something we need to stay on top of. Risks of the war escalating further are once again circulating. That is going to give gold some safe haven value," he said.

Russian forces stepped up activity on Friday, shelling the entire front line in the Donetsk region of eastern Ukraine. Meanwhile, Russia's President Vladimir Putin accused the West of "exploiting" Ukraine and using its people as "cannon fodder."

Gold price levels to watch

For gold to make another significant move higher, it needs to cross its 200-day moving average at $1,821, RJO Futures senior market strategist Frank Cholly told Kitco News. "The $1,821 level is very critical. If the market can close above it, then I get bullish. Right now, gold is struggling to get above the 200-day moving average. This is also where it topped out last week," he said.

The outlook on where rates will be next year is what will give gold its direction next week, Cholly added, noting that he is keeping a close eye on the U.S. dollar as well.

Ghali said that more buying would come in at the $1,830 an ounce level, while a drop to $1,740 an ounce could trigger a selloff.

Moya sees $1,775 as key support for gold and $1,830 as an upper boundary in the current price range.
 

Data to watch next week

Tuesday: U.S. CPI

Wednesday: Fed rate decision with FOMC economic projections

Thursday: ECB rate decision, Bank of England decision, U.S. retail sales, U.S. jobless claims, N.Y. Empire State manufacturing index, Philly Fed Manufacturing index

By Anna Golubova

For Kitco News

Time to Buy Gold and Silver

David

The fuse has been lit

The fuse has been lit

Last week I described gold as a horse that wouldn't run, but now the market has definitely found its legs as prices are ending the week near a 10-week high well above $1,800 an ounce.

A lot has changed in financial markets as we head into the weekend, and we are not just talking about Friday's extremely disappointing nonfarm payrolls report. The fuse was lit Thursday as gold prices made their move above $1,800.

The most significant shift in the marketplace has been the fact that consumers, investors, and businesses are taking the growing inflation threat more seriously. If you need proof of the looming economic hazard, you just have to take a look at commodities like copper and lumber. Copper prices continue to rally from record to record as the market faces a significant supply crunch due to growing demand and falling supply.

Copper's rally is not expected to end anytime soon. Bank of America made headlines this week when it said that it sees copper prices pushing to $13,000 a tonne. Not only does the copper market face a major supply issue this year, but the bank said that the deficit could double next year.

Rising inflation, as the U.S. economy sees robust economic growth, has also been putting pressure on the Federal Reserve and there were growing expectations that they might have to tighten its ultra-accommodative policies sooner than expected.

Tuesday, Treasury Secretary Janet Yellen spooked financial markets, including gold, when she stepped outside her lane and said that interest rates might have to rise to stop the economy from overheating.

She later walked back those comments, which helped to alleviate some of the mess she created, but she really just said what a lot of economists have been thinking as the U.S. economy continues to recover from the COVID-19 pandemic.

And now throw into the mix the extremely disappointing nonfarm payrolls data, which showed 266,000 jobs were created in April. According to reports, this is the second biggest miss in the report's history. To put this into perspective, some economists' estimates were expecting to see more than 2 million jobs created.

The latest employment report has thrown a massive bucket of cold water on any tapering expectation, at least for the next couple of months. The latest employment numbers give the Federal Reserve a little bit more breathing room, and it is creating the perfect environment for gold.

Rising inflation and low interest rates mean that real interest rates are going to remain deeply in negative territory for the foreseeable future. Even the bond market is starting to recognize this new reality as we start to see yields decline again.

So, with gold on the run, now is the time to see just how far it can go. Some analysts noted that while gold's push above $1,800 has repaired a lot of damage in the marketplace, there is still some more work to do. In particular, some analysts are anxious to see if prices can get back above their 200-day moving average.
 

By Neils Christensen

Kinesis Money the cheapest place to buy/sell Gold and Silver with Free secure storage

David