Tale of two factions – those that believe the Fed will remain hawkish, and those that believe the Fed can't

Gold prices dropped dramatically in trading today, making an intraday low of $1772.40. As of 3:25 PM EDT, gold futures are fixed at $1784.80. Today's selloff was predicated by dollar strength, with the dollar index gaining 0.90%, taking it to 94.165. That is the primary market force that made both gold and silver prices lower on the day.

Gold is currently trading down by 0.98%, and the dollar is currently trading up by 0.90%, showing that the sharp decline in gold today, the U.S. dollar was the source for the swift decline in the precious metals and the root cause of gold's $18 drop.

Gold's substantial price decline underscores the division of market participants split into two factions. The critical distinction between these two opposing sides is regarding what the Federal Reserve will announce on Wednesday when they conclude their FOMC meeting.

Yesterday, I stated that my interpretation of the current scenario was a rapidly declining economic recovery and a substantial rise in inflation would force the hand of the Federal Reserve to have a more dovish stance.

I am not alone with this belief, Thorsten Polleit, Chief Economist of Degussa explained the dilemma that currently plagues the Federal Reserve and ECB.

"It should be clear that a monetary policy of interest rate hikes and containment of credit and money supply expansion would be tantamount to an earthquake for the global economic and financial system – because the latest economic recovery has been driven by extremely low-interest and a most generous supply of credit and money. If central banks meant business and were to combat price inflation by raising interest rates back to 'normal levels,' a recession-depression would be inevitable."

This group of market analysts and traders believe inflationary pressures are much less transitory than the Federal Reserve is assuming. It creates an assumption that the Federal Reserve must back off and not raise rates too soon under the belief that it will devastate any economic recovery.

At the core of the opposing group's mentality is that even though recent data has shown that inflation is running hot, this heightened inflation he most part is transitory in nature and will subside next year. That faction's conviction is that the Federal Reserve will remain hawkish and announce the onset of tapering next week and lift-off next year.

Members of this camp include analysts at TD securities who said in a note,

"Traders across global markets have aggressively raised their outlook for policy tightening, as an energy crunch and snarled supply chains drive inflation higher, leading market participants to price the risk of a faster exit."

Lastly, there is another team playing off both sides' conviction and using it to their advantage. This bunch is comprised mainly of hedge funds that kept gold prices range-bound, selling into the top of the range and buying at the bottom. Phillip Streible, the chief market strategist at Blue Line Futures in Chicago, stated that these large hedge funds become active sellers each time gold crosses the key $1800 per ounce level. This group has benefited from the two opposing forces and the reason we have broken above $1800 twice but was unable to hold this key level as support.
 

By Gary Wagner

Contributing to kitco.com

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How bad will it get for gold price next week as markets eye Fed's tapering?

The persistent inflation narrative is forcing markets to price in more aggressive central banks, with next week's key announcements from the Federal Reserve and the Bank of England on everyone's radars.

All of the gold's gains above $1,800 an ounce continue to be capped. After breaching this key resistance level this week, the precious metal once again saw renewed selling pressure as profit-takers took the metal down around 1% on the week.

"Short-term, the market is anticipating a November taper. I suspect the Fed will trigger some downside in gold," TD Securities head of global strategy Bart Melek told Kitco News.

The surprise move by the Bank of Canada this week to end its quantities easing program has markets on edge, Melek added.

"Gold has been trading in this wide range for a while. We went into $1,806, but now we are trending lower again. Based on the Bank of Canada's hawkish surprise, many people are projecting the Fed to do something similar at some point," he said. "People will be positioning for a hawkish surprise from the Fed."

The Federal Reserve's interest rate announcement is scheduled for Wednesday, with markets projecting for the central bank to begin tapering its $120 billion monthly asset purchases.

According to the previous Fed meeting minutes, "gradual tapering" would begin in November and in June. The CME FedWatch Tool is also forecasting a 47% chance of a rate hike come June and a 40% chance of a second rate hike come September.

"A taper announcement looks inevitable now that officials, by and large, agree that 'substantial further progress' has been made on both the inflation and employment mandates. Moreover, the minutes of the September FOMC meeting outlined a potential timetable that starts in November with asset purchases reduced by $15b each month, split $10b Treasuries and $5b Agency Mortgage-Backed Securities," said ING chief international economist James Knightley. "We don't think interest rate increases will be far behind and markets seem to agree with earlier interest rate hikes being anticipated across developed markets."

Central banks around the world are starting to tighten as well, which is shrinking the global stimulus. But markets might be a bit too aggressive in anticipating rate hikes in the U.S., OANDA senior market analyst Edward Moya pointed out.

"We have to remember that before the Fed can start rate hikes, they need to see unemployment rate continue to fall. The Fed can't raise rates quickly. You are going to see fed Chair Powell remain extremely cautious on rate hikes. With all of the fiscal and monetary support already out there, the biggest fear would be a policy mistake. The Fed can't let a lot of those efforts go to waste," he noted. "The Fed doesn't want to do anything that derails this recovery. If they were to turn hawkish, it would disrupt their goal as far as the labor market recovery."

In the meantime, it's been a mixed bag of macroeconomic data for gold this week. But one narrative that remains constant is the fear of runaway inflation. And it is not just a problem in the U.S. or Europe anymore — it is a global issue, said Moya.

Friday morning, markets digested euro zone inflation hitting a new 13-year high in October, with the headline number rising 4.1%.

"What stood out this morning employment cost index. That had the largest gain since 2001. It is apparent that inflation worry is not easing any time soon," Moya told Kitco News. "Right now, the market is on edge as far as what will the Fed do next week. You have a market that is a little bit unclear on whether inflation will drag down growth over the next couple of quarters. As far as gold goes, it struggled to attract investors. The market is really having trouble justifying increasing safe-haven positions just yet."

 

Gold needs to hold this level

There is a risk of a gold selloff following the Fed announcement next week, noted Moya, adding that the precious metal could see increased volatility and a choppy trading environment.

Gold has been trading in a wide range for several months — $1,680-$1,840 an ounce. Right now, $1,750 is a key support level that must hold, he added.

"You are probably going to see gold continue to consolidate leading up to taper day. There could be a dip that emerges post-Fed. That's when you buy gold. We could see one last major push lower next week. If there was a major move lower to $1,720, that's when you would consider scaling into gold. If the dip is bought, it won't be hard to recapture $1,800 an ounce," Moya explained.

If gold fails to hold $1,784 and then tumbles below $1,745, things "could get ugly" for the precious metal, said Walsh Trading co-director Sean Lusk. "If we don't hold, we could see $1,680," Lusk said.

 

Data to watch

Aside from the big Fed announcement on Wednesday, the Bank of England is scheduled to release its interest rate decision on Thursday

"Bank of England poised to hike interest rates for the first time since Covid-19," Knightley said. "Markets are fully pricing the first 15bp rate rise from the Bank of England next week. Economists are less sure, and the consensus is relatively split. But the message from Governor Andrew Bailey and his colleagues has strongly hinted that the Bank doesn't want to hang around."

Another important release to monitor next week will be the U.S. October employment data, with market consensus calls projecting for an additional 413,000 positions to have been added and for the unemployment rate to have dropped to 4.7%.

Other macroeconomic data to keep an eye on are the U.S. ISM Manufacturing PMI on Monday, ADP nonfarm employment and ISM non-manufacturing PMI on Wednesday, as well as jobless claims on Thursday.

 

By Anna Golubova

For Kitco News

 

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Gold modestly up in choppy trading, supported by big drop in USDX

Gold prices are mildly higher in midday trading Thursday, on a choppy and two-sided trading day. Solid losses in the U.S. dollar index today are prompting some buying interest in the precious metals markets. A U.S. GDP report that was downbeat and which fell into the camp of the U.S. monetary policy doves, who want the Federal Reserve to hold off on tapering its monetary policy stimulus, was also friendly for the metals markets today. December gold was last up $4.40 at $1,803.00 and December Comex silver was last down $0.046 at $24.15 an ounce.

The U.S. data point of the day saw the advance estimate for third-quarter gross domestic product come in at up 2.0%, compared to expectations of up 2.8%, year-on-year and a 6.7% growth reading in the second quarter. The closely watched PCE price index was reported at up 5.3%, compared to a rise of 6.5% in the second quarter. The weaker GDP data was somewhat offset by the weekly U.S. jobless claims report that showed a decline.

Global stock markets were mostly weaker in overnight trading. The U.S. stock indexes are solidly higher at midday, and that is limiting the upside in the safe-haven metals. Trader and investor attitudes are upbeat this week, as they choose to focus on positive corporate earnings reports. For the moment the marketplace is brushing aside slowing economic growth in China, supply chain bottlenecks and rising inflation prospects.

The European Central Bank held its regular monetary policy meeting Thursday. No changes in ECB monetary policy were implemented and not were expected. The ECB did say that its bond-buying program would continue until at least March of 2022. In her press conference ECB President Christine Lagarde was expected to say the Euro zone remains too weak for policy makers to pull back stimulus. Meantime, Canada’s central bank on Wednesday ended its quantitative easing program.

The World Gold Council reported gold demand in the third quarter declined 7% compared to Q3 2020. Outflows from gold-backed ETFs were the primary factor. Increasing jewelry demand did mitigate the slide in demand, said the WGC. Gold jewelry demand grew 33%, year-on-year. Meantime, central banks purchased 69 metric tons for reserves vs 10 MT in same period in 2020.

The key outside markets today see the U.S. dollar index sharply down and hitting a four-week low. Crude oil prices are lower and trading around $81.75 a barrel. Meantime, the 10-year U.S. Treasury note yield is presently fetching 1.556%.

Technically, December gold futures bulls have the overall near-term technical advantage amid a four-week-old price uptrend in place on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at the September high of $1,836.90. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,750.00. First resistance is seen at today’s high of $1,812.70 and then at the October high of $1,815.50. First support is seen at today’s low of $1,793.10 and then at this week’s low of $1,783.00. Wyckoff's Market Rating: 6.5

December silver futures bulls have the overall near-term technical advantage. Prices are in a four-week-old uptrend on the daily chart. Silver bulls' next upside price objective is closing prices above solid technical resistance at $25.00 an ounce. The next downside price objective for the bears is closing prices below solid support at $23.00. First resistance is seen at Wednesday’s high of $24.33 and then at this week’s high of $24.695. Next support is seen at this week’s low of $23.905 and then at $23.615. Wyckoff's Market Rating: 6.0.

December N.Y. copper closed up 540 points at 444.30 cents today. Prices closed nearer the session high today and hit a three-week low early on. The copper bulls and bears are on a level overall near-term technical playing field. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 465.00 cents. The next downside price objective for the bears is closing prices below solid technical support at 420.00 cents. First resistance is seen at 450.00 cents and then at this week’s high of 456.85 cents. First support is seen at today’s low of 435.25 cents and then at 430.00 cents. Wyckoff's Market Rating: 5.0.
 

By Jim Wyckoff

For Kitco News

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Gold, silver gain as U.S. dollar, bond yields decline

Gold and silver prices are higher and near their daily highs at midday Wednesday, supported by a weaker U.S. dollar index and falling U.S. Treasury yields on this day. Trading was choppy and on both sides of unchanged today, as traders are awaiting new fundamental developments to move the precious metals markets. December gold futures were last up $4.70 at $1,798.10. December Comex silver was last up $0.112 at $24.20 an ounce.

The key outside markets today see the U.S. dollar index weaker. Crude oil prices are solidly lower and trading around $82.50 a barrel. Meantime, the 10-year U.S. Treasury note yield is presently fetching 1.539%, well down from this week’s high.

Global stock markets were mostly weaker in overnight trading. The U.S. stock indexes are mixed at midday. The major U.S. stock indexes this week have hit record highs. The indexes have made impressive recoveries from their early-October lows. Traders and investors remain upbeat amid third-quarter corporate earnings reports that are mostly beating market expectations. There are storm clouds on the horizon, however. China’s economic growth has slowed as the world’s second-largest economy deals with an overheating housing sector, resurgent Covid-19 cases in some regions, and an energy crisis that has produced shortages of some key raw materials—not only in China but also in nations that China supplies with those materials.

Tensions between the U.S. and China have up-ticked at mid-week, following reports the U.S. banned China’s biggest telecommunications operator, China Telecom, from doing business in the U.S.

Technically, December gold futures bulls have the overall near-term technical advantage amid a four-week-old price uptrend in place on the daily bar chart. Bulls’ next upside price objective is to produce a close above solid resistance at the September high of $1,836.90. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $1,750.00. First resistance is seen at today’s high of $1,800.00 and then at this week’s high of $1,811.50. First support is seen at this week’s low of $1,783.00 and then at $1,775.00. Wyckoff's Market Rating: 6.0

December silver futures bulls have the overall near-term technical advantage. Prices are in a four-week-old uptrend on the daily chart. Silver bulls' next upside price objective is closing prices above solid technical resistance at $25.00 an ounce. The next downside price objective for the bears is closing prices below solid support at $23.00. First resistance is seen at today’s high of $24.33 and then at this week’s high of $24.695. Next support is seen at today’s low of $23.905 and then at $23.615. Wyckoff's Market Rating: 6.0.

December N.Y. copper closed down 940 points at 439.15 cents today. Prices closed near the session low today and hit a three-week low. The copper bulls have lost their overall near-term technical advantage. A four-week-old uptrend on the daily bar chart has been negated. Copper bulls' next upside price objective is pushing and closing prices above solid technical resistance at 465.00 cents. The next downside price objective for the bears is closing prices below solid technical support at 420.00 cents. First resistance is seen at 450.00 cents and then at this week’s high of 456.85 cents. First support is seen at today’s low of 436.30 cents and then at 430.00 cents. Wyckoff's Market Rating: 5.0.
 

By Jim Wyckoff

For Kitco News

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David

The Fed won't be able to get inflation under control, gold price is going much higher – Wilshire Phoenix

Investors are once again turning to gold, pushing prices back above $1,800 an ounce, and one firm expects gold prices to continue to move higher as it is unlikely the Federal Reserve will be able to get the inflation under control anytime soon.

In a recent interview with Kitco News, Wade Guenther, managing partner at Wilshire Phoenix, which launched the Wilshire wShares Enhanced Gold Trust (NYSE Arca: WGLD) earlier this year, said that it's not surprising that gold has been lackluster through most of the summer as bond yields have been rising.

The yield on 10-year notes is holding near its highest level in three months. At the same time, Guenther noted that the yield on 10-year notes has roughly doubled from last year.

Gold has also struggled to attract safe-haven demand as equity markets continue to move from record highs to record highs, Guenther added.

However, Guenther also said that rising inflation and the growing threat of stagflation are forcing many investors to reevaluate their need for inflation and safe-haven hedge. For the past five months, the U.S. Consumer Price Index has been above 5%.

"If you had asked me last year, the gold price was, I would be if inflation was at 5%, I'd have said that we would be at record highs, we'd be back at 2000 again," said Guenther.

However, instead of supporting gold prices, the inflation pressures have driven expectations for the Federal Reserve to tighten its monetary policy. Economists are expecting the Federal Reserve to reduce its monthly bond purchases before the end of the year. At the same time, markets are pricing in a rate hike as early as June of 2022.

"It feels like people still have faith in the Fed and I just, but I just, I don't see the Fed getting in front of the inflation curve," said Guenther.

Guenther added that the current inflation environment is different from the last few years because it isn't being driven by consumer demand. Prices are going higher because of major supply-chain issues around the world. Some economists expect that the global supply bottleneck could take years to fix.

"There is nothing the Federal Reserve can do to fix the supply chain," he said. "The Fed's tools just don't work on because the inflation is on the long side of the track. This is not inflation driven by consumer demand."

Not only is the Federal Reserve unable to fix the global supply chain, but Guenther also noted that monetary policy could only be tightened so much. Growing government debt has limited how high interest rates can go, he said.

With gold prices back over $1,800 an ounce, Guenther said that he expects that it is only a matter of time before the market sees new bullish momentum.

Guenther added that the firm's adaptive gold-backed exchange-traded fund still remains 100% invested in the gold market as volatility has been relatively low.

 

By Neils Christensen

For Kitco News

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Inflation threat can drive gold prices back to $1,830 next week

The growing inflation threat remains the most extensive support for the gold market as analysts see the potential for prices to test critical resistance around $1,830 in the near term.

Friday morning, gold prices pushed to a six-week high as rising inflation pressures have pushed breakeven rates in the five-year bonds to their highest level in a decade. The breakeven rate is the difference in yields between bonds and Treasury Inflation-Protected Securities (TIPS). The difference represents the inflation rate needed to equalize their returns.

However, gold lost some significant ground, falling $30 in a matter of minutes after Federal Reserve Chair Jerome Powell tried to talk down the rising inflation threat.

In an online conference hosted by the South African Reserve Bank, despite significant sound issues, Powell reiterated his outlook that the U.S. central bank is on track to reduce its monthly bond purchase before the end of the year. He added that the monthly purchases are expected to end by mid-2022.

However, not all analysts are convinced that Powell and the U.S. central bank will be able to resolve the growing inflation expectations.

Daniel Pavilonis, senior commodities broker with RJO Futures, said that the rise in yields could indicate that inflation expectations are becoming unanchored and with economic activity starting to slow, the Federal Reserve will have limited tools.

“I don't think the Federal Reserve has the ability to bring inflation back under control," he said. “We are seeing the risk of stagflation continue to grow and that will be good for gold and all commodities. Gold will do well as investors will see it as a value play."

Wade Guenther, managing partner at Wilshire Phoenix, said in a recent interview with Kitco News that he also doesn't see the Federal Reserve getting ahead of the inflation curve.

Guenther explained that inflation is currently being driven by the continued disruption of the global supply chain. He added that the supply crunch could last longer than is initially expected, which means inflation will remain elevated.

“There is nothing the Federal Reserve can do to fix the supply chain," he said. “This is not inflation driven by consumer demand."

Although he remained relatively positive on economic activity, Powell noted a growing risk that the supply-chain disruptions persist longer than expected, which could keep inflation high through 2022.

However, he added that the base case is for the supply bottlenecks to be resolved and for inflation to fall back to 2%.

Inflation is also a growing global problem. This past week Canadian data showed that consumer prices rose to their highest level in 13 years last month.

In Britain, inflation pressures remained elevated and above the Bank of England's target for a second consecutive month.

Gold looks good, but still faces a lot of competition

While inflation pressures continue to support gold prices, analysts note that the dynamic has changed slightly as the precious metal faces new competition, particularly from Bitcoin.

This past week, bitcoin prices rose to a new record high above $65,000 an ounce. The rally in the digital currency coincided with the launching of a new Bitcoin exchange-traded product (ETF). The ProShares Bitcoin Strategy ETF started trading Tuesday and tracks CME Bitcoin Futures.

Some analysts have noted that although the new Bitcoin ETF adds a new layer of legitimacy to the digital currency marketplace, it is not a significant gamechanger for gold.
 

“Yes, bitcoin has taken some momentum and capital away from the gold market, but gold is far from being obsolete," said Ole Hansen, head of commodity strategy at Saxo Bank. “Will every gold investors sell their gold to buy Bitcoin? No."
 

Hansen added that equity markets, which are trading near record highs, are also strong competition for gold. However, he said that momentum can quickly shift back to gold's favor if the precious metal can break above $1,835 an ounce.

U.S. dollar remains a headwind for gold

Along with Bitcoin and equity markets, analysts also say that they are still keeping an eye on the U.S. dollar. The U.S. dollar index has managed to hold critical support above 93.50 points.

David Madden, market analyst at Equiti Capital, said that while he sees room for gold prices to test resistance around $1,830, he doesn't expect that level to break.

He added that a significant risk event next week for gold and the U.S. dollar will be the European Central Bank's monetary policy meeting. The euro has lost some ground against both the British pound and the U.S. dollar; however, Madden said that the ECB probably likes this current environment and will be careful not to shift the current market sentiment.

He added that if President Christine Lagarde strikes a dovish tone and downplays the inflation outlook, that could weaken the euro against the U.S. dollar, which would be negative for gold.

Data to watch next week

While the ECB will be the main focus next week, the Bank of Canada and the Bank of Japan are also holding monetary policy meetings. The bank of Canada could be under pressure to tighten its monetary policies sooner than expected after inflation rose to a 13 year high in September.

The economic docket will also have some important U.S. data. Tuesday markets will receive U.S. consumer confidence data for October and new home sales numbers for September. Wednesday is the release of durable goods report that will gauge the health of the nation's manufacturing sector.

Thursday markets will receive the first reading of third-quarter U.S. GDP. Analysts have said that any miss in this report could be good for gold as it would raise further fears of the growing stagflation fears.
 

The week ends with the release of October inflation data and personal consumption and income numbers.
 

By Neils Christensen

For Kitco News

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David

Gold price to double as Fed kicks off tightening and economy flatlines

Gold has the potential to double once the Federal Reserve begins to tighten and hike rates to fight off hotter-than-expected inflation, said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

"If you inflation adjust gold for its 1980 high, it can go to $2,500, it can overshoot $3,000 plus," Boockvar told Michelle Makori, editor-in-chief of Kitco News. "Silver … can get back to its highs of $50 plus. Name me one asset that's down 50% from its record high. I can't really think of many other than silver."

Boockvar is bullish on precious metals because of his inflation and slower growth outlook. "Inflation is not transitory. And that will be the most important thing in determining the direction of the economy and the markets. I don't expect a reversion back to pre-COVID levels," he said.

This sticky inflation is what is forcing central banks around the world to begin tightening. And the next major step will be raising rates. And that has major implications.

"We are now on the cusp of global tightening, and however glacial, it's going to have major repercussions," he explained. "Since 2010, every notable market correction coincided with the end of QE. So I'm not going to be delusional and think the Fed and other central banks are going to tighten, and there's not going to be a problem."

The Federal Reserve gave a clear signal that they will start tapering in November, with the CME FedWatch Tool now anticipating a 43% chance of a rate hike as soon as June.

However, the obstacle for the Fed is how far behind the curve it is, added Boockvar. "You have the most intense inflationary pressure since the 1970s. And the Fed is going to do seven months of tapering, and rates are still going to be at zero," he said.

This is why Boockvar doesn't see anything more compelling than investments in gold and silver. Both metals have found their bottom and are ready to resume their bull rallies, he said.

"Gold and silver bottomed in December 2015, just as the Fed started raising interest rates for the first time in seven years. Gold went up with interest rates in the 1970s. The federal funds rate in the mid-2000 went from 1% to 5.25%, and gold doubled," he noted.

The gold mining industry is also a winning trade right now. "The miners are very cheap, and they're not getting any respect [despite] paying healthy dividends," Boockvar stated. "When we think about the good mining companies that have the all-in sustainable costs of $800, even $900, and they can sell gold at $1,800, that's a pretty large profit margin that these companies haven't had in a while."

Watch the video above to find out why Boockvar thinks the economy could "flatline" in the third quarter. Follow Michelle Makori on Twitter: @MichelleMakori (https://twitter.com/MichelleMakori).

For Kitco News

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David