Gold at risk of a major drop as prices at 'pivotal point' – analysts

With the latest inflation numbers stressing out markets across the board, gold is at a "pivotal point," according to analysts who are not ruling out a deeper selloff if gold drops below $1,800 an ounce.

This week's big surprise was the hawkish Federal Reserve meeting minutes, which revealed that "a few" FOMC members were leaning towards a 50-basis-point hike instead of the more dovish 25-bps increase adopted at the February meeting.

On top of that, the Fed's preferred inflation measure — the annual core PCE price index — accelerated in January, coming in at 4.7% versus the expected 4.3%.

"There's a major reset in how high rates will go. People are now thinking over 6%. That's significant enough that it is breaking gold's back," OANDA senior market analyst Edward Moya told Kitco News.

If there is further momentum towards $1,800 an ounce, it could "get ugly" for gold, and prices could drop another $50, Moya added.

At the time of writing, April Comex gold futures were trading at $1,816.60 an ounce, down for the fifth week in a row.

"This is a pivotal point right here," Forex.com senior technical strategist Michael Boutros told Kitco News. "If we get a weekly close below $1,807-$1,805, you risk a big drop. And you could be looking at $1,750s."

It is the macro outlook that is weighing on gold. In January, the precious metal rallied on the idea that the Fed could cut rates at the end of 2023.

Now, the reality is starting to set in, Boutros explained. "And inflation numbers we got today are showing that. And that adjustment to higher rates is hitting the markets," he said.

The good news for gold is that this rate re-pricing is also impacting the equity space. And if the S&P 500 and the Dow keep falling, gold might see some support as the safety trade, Boutros noted. "That should put some sort of floor under gold's price," he added.

Geopolitical tensions are also not letting up, which is working in gold's favor in terms of finding a bottom in this downtrend.

"People are throwing around all these big words like 'nuclear threats.' It is the first anniversary of the war in Ukraine, and it is time for a reality check. The threat is there. And if that threat becomes more prominent on a global scale and if these talks continue to deteriorate, at some point, that will factor in," Boutros pointed out.

The volatility in the gold market is far from over, as prices can fall as quickly as they recover, said Gainesville Coins precious metals expert Everett Millman.

"Given gold's nature to have these quick selloffs and recoveries during times of panic, there is not an extremely strong floor right now. I wouldn't be surprised to see gold break below $1,700, with expectations that it would come back up pretty quickly if there is an escalation in Ukraine," Millman told Kitco News.

With markets realizing the difficulty in bringing inflation down to the Fed's 2% target, gold will remain vulnerable in the short term.

"There is some support at $1,750, but then you don't have anything major until possibly $1,730. This is a major change in sentiment," Moya said.

Next week's data

Analysts will monitor the macro data scheduled for next week for any signs of weakness after a solid start to the year.

"We cautioned that the stark contrast in weather between December's wintery, cold conditions … and January's almost spring-like temperatures played a big part in the strength of data," said ING's chief international economist James Knightley. "[Next] week, we will get a first test of that hypothesis with the ISM manufacturing and service sector reports for February."

Monday: U.S. durable goods orders, U.S. pending home sales,

Tuesday: U.S. CB consumer confidence

Wednesday: U.S. ISM manufacturing PMI

Thursday: U.S. jobless claims

Friday: U.S. ISM non-manufacturing PMI

By Anna Golubova

For Kitco News

Time to Buy Gold and Silver

David

PCE inflation index jumps to 5.382% YOY or 0.6% in January

The preferred inflation index used by the Federal Reserve; the core Personal Consumption Expenditures (PCE) index jumped to its highest value since last summer. The core PCE increased by 0.6% in January when compared to the prior month, taking the year-over-year PCE to 5.382%. Today's PCE report was the result of surging consumer spending after a dramatic decline at the end of last year.

According to the BEA, "Personal income increased $131.1 billion (0.6 percent) in January, according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased $387.4 billion (2.0 percent) and personal consumption expenditures (PCE) increased $312.5 billion (1.8 percent). The PCE price index increased 0.6 percent in January. Excluding food and energy, the PCE price index also increased 0.6 percent (table 9). Real DPI increased 1.4 percent and Real PCE increased 1.1 percent; goods increased 2.2 percent and services increased 0.6 percent."

The net result was strong declines in US equities and precious metals and gains in both US treasury yields and the dollar. This raises expectations that the Federal Reserve will raise rates by ¼% for the next three consecutive FOMC meetings. This also raises the expectations by market participants that the terminal fed funds rate will move to a higher target than 5.1%.

Most importantly, this report confirms that components of inflation remain sticky or persistent. This after an extremely hawkish monetary policy by the Federal Reserve has raised rates at the last eight consecutive FOMC meetings. The Fed raised its benchmark rate from near zero in March 2022 to 4.5% – 4.75% last month. It has also raised the probability of ½ a percent rate hike at the next FOMC meeting in March. According to the CME's Fedwatch tool, there is a 27% probability of that outcome.

Today's PCE report creates more bearish downside pressure for gold and silver. As of yesterday, gold futures were already priced below the opening price on January 3, the first trading day of the year.

Today's April gold futures gave up $8.80 or 0.48% and is currently fixed at $1818. March silver lost 2.66% or $0.57 and is currently fixed at $20.74 per ounce. Today's PCE report will only strengthen the resolve of the Federal Reserve to "do whatever it takes", to reduce inflation to their target level of 2%. However, their current target might be unachievable at least according to El-Erian, a Bloomberg Opinion columnist who doubts whether the Federal Reserve can achieve that goal. In fact, 3% to 3 ½% might be the new 2%.

By Gary Wagner

Contributing to kitco.com

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Federal Reserve minutes were released today, "But Wait There's More"

I know it is a little cliché to use a phrase most recognized from late-night ads hawking everything from pots to knives, to discuss the FOMC minutes released today, but the minutes continue to send the same message to the American public. The Federal Reserve will continue and implement "more" rate hikes until "inflation is clearly on a path towards 2%."

The Fed's hawkish monetary policy seeks to raise its benchmark Fed funds rate to a target just above 5%, and keep that rate elevated until incoming data provide confidence that inflation is on a sustained downward path to 2%.

The minutes revealed that Federal Reserve members almost unanimously anticipate that it is appropriate to raise its Fed funds rate by 25 basis points at the next FOMC meeting scheduled to be held in March, although two officials favored a larger 50 basis point hike.

"Market participants interpreted incoming data as pointing to moderating inflation risks. Against this backdrop, market participants judged that the FOMC would likely slow the pace of rate increases further at the current meeting, and respondents to the Desk's Survey of Primary Dealers and Survey of Market Participants widely expected the Committee to implement a ¼ percentage point increase in the target range for the federal funds rate."

According to Bloomberg News, "US central bankers raised interest rates by a quarter-point, moderating their action after a half-point hike in December and four consecutive jumbo-sized 75 basis-point increases. The move lifted the benchmark policy rate into a range of 4.5% to 4.75%. Both Chair Jerome Powell and the minutes indicated that officials are prepared to raise rates further to produce a broader slowdown in the economy that tamps down inflation."

The release of the Fed minutes today created bullish momentum for the dollar and concurrently more sustained bearish momentum for gold. The dollar gained 0.36% today or 37 points fixing the dollar index at 104.485.

As of 5:10 PM EST, the most active April contract of gold futures is down $8.30 or 0.45% and fixed at $1834.20. Today's decline effectively sealed the fate of gold's strong price decline in February. Gold pricing is now below the opening price of January 3, the first trading day of the year.

By Gary Wagner

Contributing to kitco.com

Time to Buy Gold and Silver

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Gold prices can go lower, but now is the time to build a strategic position – Incrementum' Ronald-Peter Stöferle

Now is the time for investors to look at building a strategic position in the gold market, according to one market strategist, as prices are expected to struggle in the near term due to rising bond yields on the short end of the curve.

In an interview with Kitco News, Ronald-Peter Stöferle, managing partner and fund manager at Incrementum AG and one of the authors of the annual In Gold We Trust report, said that he is expecting to see lower gold prices in the near term as markets begin to price in further aggressive monetary policy action from the Federal Reserve.

Persistently higher inflation has prompted markets to price in a 21% chance that the Federal Reserve will raise interest rates by 50 basis points next month. These shifting expectations have pushed the yield on U.S. two-year notes above 4.6%, its highest level since 2007.

At the same time, the yield on one-year notes is above 5%. Stöferle noted that when looking at inflation expectations, real bond yields are currently seeing positive returns.

"This is a tough environment for gold and I expect to see further downside risks in the next couple of weeks," he said.

The comments come after April gold futures ended last week in neutral territory at around $1,850 an ounce. Markets are closed Monday for the Presidents' Day long weekend.

However, Stöferle added that the gold market continues to show relative strength despite the selling pressure. He explained that he sees the price action and resilient strength in gold as the market calling out central bankers' hawkish rhetoric.

The rise in shorter-term bond yields has pushed the inverted yield curve to its widest level in 40 years. Stöferle said that this market trend indicates that it's only a matter of time before the U.S. falls into a recession and the Federal Reserve is forced to unwind its aggressive tightening.

Stöferle said that he expects that as soon as unemployment starts to rise, the Fed will quickly loosen interest rates.

"In the 2022 In Gold We Trust, we said that central bankers are doves in hawkish clothing and nothing we have seen has changed this view," he said. "As soon as credit markets tighten, there's no way the Fed or any central banker will stay hawkish."

While there is growing optimism in the marketplace that the U.S. can avoid a recession, Stöferle said that many investors have underestimated the time lag in monetary policy. He added that the Federal Reserve has already made its policy mistake and it's only a matter of time before something breaks.

 Commerzbank lowers mid-year gold price forecast to $1,800 due to shifting interest rate expectations

Not only has the Federal Reserve raised interest rates by 450 basis points this tightening cycle, but it has also reduced its balance sheet by $500 billion. Stöferle said that it's only a matter of time before the economy feels the effects of reduced liquidity in the marketplace.

"It's like being in a room that is losing oxygen. At first, you might not notice anything, but then it gets harder to breathe. Soon, you are rushing to the exits, hoping to get out before it's too late," he said. "Not only is the risk of a recession rising, but I think we could see a major fiscal crisis."

In this environment, Stöferle said that now is the time to take advantage of lower gold prices and build a strategic position ahead of the second half of the year. He added that one strategy investors should look at is building a position through cost averaging, where you look to buy at successively lower prices.

Despite lower prices in the near term, Stöferle said that gold prices are still on track to end the year above $2,000 an ounce.

By Neils Christensen

For Kitco News

Time to Buy Gold and Silver

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Gold/Silver – Now is the time to dollar cost average

It was just seventeen days ago (February 1) when Gold went on a two-day rally looking as though it was going to punch back through $2000/oz (Silver $25/oz), and if you were not already on board, you thought you missed it for good. Since then, Gold and other Precious Metals seem to have hit the "pain train" as economic data continues to support an aggressive Fed policy stance leading to a stronger U.S. Dollar and rising Treasury Yields. While the Fed may want to keep its hawkish narrative alive, the reality is that the wheels are already starting to fall off the economy, and no matter what cards they hold up their sleeves, they will ultimately have to pivot dovish to save face.

Even though the Fed aims to stay "apolitical" and is laser-focused on getting back down to a 2% inflation target, the probability of reaching that goal in this new global environment is nil. The heightened geopolitical tensions and unpredictable weather patterns leave basic commodity prices at elevated levels that are here to stay. Those rising input costs will ultimately lift the prices of all goods and services, and those costs will drive the consumer to take on more debt. The rising borrowing costs will spear the economy into a recession where political leaders will pressure the Fed into reversing policy action. That is why I believe getting on board assets like Gold and Silver on this decline makes sense to "dollar cost average" to try and take advantage of the recent declines.

Daily Silver Chart

Since their October 2022 lows, Gold and Silver saw substantial gains, which peaked in January. The short-term traders and investors involved in those markets then began liquidating those holdings and going back to chasing "profitless tech and cryptocurrencies." Now that those asset classes have once again peaked, a rotation back into hard assets will become underway in anticipation of a "Fed pivot." I anticipate this occurrence happening in the second quarter. To further help you develop a trading plan, I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold that can easily apply to Silver." The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Silver.

Daily Gold Cha

Strategy

By systematically purchasing regular intervals of the 10-ounce Gold contract or 1000-ounce Silver contract, you can layer in over time and preposition for the next rally. One example with a $25,000 account size would be to focus on the December 2023 10-ounce Gold contract and use a dollar-cost average approach by purchasing 10 ounces of Gold at 1850/oz, 10 oz at 1800, and 10 oz at 1750 with a year-end target of $2100/oz. If filled on all three contracts, your average price will be $1800/oz; therefore, every dollar move Gold makes on the three contracts will be $30 since you control 30 ounces. If the $2100/oz price objective is achieved by year-end, this will result in a gain of approximately $9,000 (30 oz times $300 rise). Traders should also consider proper risk management while using a dollar-cost averaging approach, such as a hard stop on three contracts at $1700. If that were to occur under this scenario, it would likely result in a loss of $3,000. If you have never traded futures or commodities or would like to learn more about taking delivery of Silver, I just completed a new educational guide that answers all your questions on transferring your current investing skills into trading "real assets," such as the 1000 oz Silver futures contract. You can request yours here: Trade Metals, Transition your Experience Book.

By Phillip Streible

Contributing to kitco.com

Time to Buy Gold and Silver

David