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 amid the unmistakable bearish and bullish sentiment towards the end of the year.
“We are likely to see more immediate action from central banks”
The yellow metal lost six months in a row in mid-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, comments on the developments in the form:
A number of major risk events on the horizon helped gold recover. If the UK faces the end of time in bond purchases in a week, it may have to announce measures over the weekend. The BOJ had to intervene to support the Japanese yen. And we are expected to see more immediate action from central banks. This shows that global market risks are increasing. That’s why you made a lot of bets to support a Fed pivot soon.
“A tough environment for gold”
However, not all macro information is exemplary with this view. Friday’s September jobs report reaffirmed that the employment situation is still strong. In addition, Koindeks.com showed that the unemployment rate fell to 3.5%. According to analysts, this is not a level that 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 not showing up now.
That’s in the middle, markets are pricing another 75 basis points gain at the November meeting at 78%, according to the CME FedWatch Tool. This means the fourth consecutive increment of this magnitude. Edward Moya explains:
The decline in price pressures is not as fast as it should be. The Fed will continue to be very aggressive with its hawkish pronunciation, and this is a troubling environment for gold. We’re going to see gold’s slightly more downside vulnerability here.
“Fed unlikely to return quickly”
Analysts warn that if rate hike expectations rise, this week’s gold rally will likely reverse. Everett Millman notes the following for his views on this bet:
This could be a short-lived rally. Partly because a lot of investment logic depends on the Fed turning and slowing rate hikes to keep gold real. The basic assumption is that other central banks have already returned. But other central banks will act faster than the Fed. It is unlikely to return in quick form as it will damage 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 the middle of 9 to 18 months for changes in interest rates to be filtered out in economics. So, according to the analyst, if inflation starts to cool, the possibility of further rate hikes before they take effect increases the likelihood of the Fed itself getting ahead of it. In this context, the analyst says:
The Fed was presumably more concerned than warranted to deal with inflation. For gold, this means some significant weaknesses in the short term. But at the end of this year or at the beginning of next year, an explosive increase in the gold price is possible if the effects of high interest rates are filtered out.
A number of factors supporting gold in this middle are geopolitical tensions, including the war in Ukraine, the escalating nuclear threat, and the power crisis. In addition, the seasonal dynamic works in favor of gold. Millman said, “We have entered the festive season in India. Then it’s the wedding season. Also, there is a big 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. A random chill will increase bets around a Fed pivot. This will help gold rise. Just in time, a warmer-than-expected report could herald another cut for the expensive metal. Edward Moya comments on the bet:
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 on the 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 assumptions 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%. The hold of ING’s international chief economist, James Knightley, is as follows:
The lagged effects of the decline in gasoline prices will suppress headline prices. This is expected to translate into somewhat lower airline prices. However, the core (with food and power output) component will continue to rise rapidly.
Weekly gold technical analysis
Market analyst Christopher Lewis analyzes the technical outlook of gold in the following form. Gold markets initially tried to break true to the $1,750 level, which was a valuable area. But he withdrew from there to show signs of hesitation. The 200-Week EMA remains something worthy of attention. Also, he reacted to it. However, it’s about to fall under again. This reveals the possibility of a drop to the $1,680 level. This is an area that has been supported many times over the years. So there was great agreement. Now that you’ve jumped over it, it will be interesting to see how it turns out. Because we are in the middle of a great war on a great level.
If it falls below last week’s hammer, it’s possible that this will create some pretty valuable selling pressure. It will depend on these multiple US dollars and how it behaves. This is something you need to be very careful about. Even more valuable than that, “Will there be an interest rate in America?” If they continue to increase, this 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 certainly makes 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.