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'Fed is all bark and no bite': gold price zeroes in on U.S. employment report next week

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(Kitco News) The confusion over the Federal Reserve's hawkish message followed by Jerome Powell's dovish testimony has created a lot of volatility and uncertainty, which is keeping gold right below the $1,800 an ounce level.

Analysts remain bullish on gold next week but note that it is essential for the precious metal to breach the $1,800 an ounce level in order to get some excitement back into the space.

"Gold continues to recover. It has to break above $1,795.60," Blue Line Futures chief market strategist Phillip Streible told Kitco News. "Last week, the selloff was overdone, which gave a lot of people good opportunity to position into the year-end."

All the attention has been on the Federal Reserve's higher inflation expectations and a possibility of two rate hikes as soon as 2023. But Streible pointed out that the latter is very unlikely.

"The Fed is all bark and no bite. They had to come out and make a bold statement to curb some commodity prices, which they did. And this week, there was a collaboration between other Fed members, who reiterated that message. However, the reality is that they won't be able to live up to it. The full employment target will take longer. I do not see them raising rates twice in 2023," he said.

Overall, there was a lot of confusion around the Fed's monetary statement and a barrage of Fed commentary that followed.

"We've seen a lot of volatility and a lot of drivers, like the Fed going back and forth," said Gainesville Coins precious metals expert Everett Millman. "Right after the meeting, everyone took the Fed as being very hawkish. Subsequently, Fed speakers backed that up. But Powell's testimony struck a much more dovish tone. This is causing a lot of these ups and downs for the broader markets and gold."

There is a good chance that gold could end up getting stuck around the $1,790 an ounce level if there are no major downside surprises on the data front, said TD Securities head of global strategy Bart Melek.

"Our view is that the average gold price for Q3 is $1,790 and then we could start to see better prices later on," Melek told Kitco News. "Any data that points to the Fed not being able to take a robust action on the hawkish side to calm inflation down is bullish for gold. If inflation is not an issue later on, the Fed could walk back some of its comments about raising rates in 2023."

The 2023 rate hike signal was nothing more than just the Fed's projections, which never go perfectly, Melek added. The more likely reality is that the Fed will be quite accommodative for a long time.

Gold's next resistance level is around $1,818 and then $1,833, while support is at $1,775, Melek noted.

One possible bearish sign going into next week is gold's non-reaction to the U.S. President Joe Biden's tentative deal on a $579 billion infrastructure plan, which is said to create millions of jobs.

"Gold should stabilize around these levels. But any upside is tough. The big infrastructure announcement on Thursday didn't do anything for gold. Why is gold not reacting positively to more stimulus? It is holding, but it's not trading $2,500. Even with crypto selling off, gold is not experiencing a rally. This is a significant factor and not really bullish," said Phoenix Futures and Options LLC president Kevin Grady.

The impact of the Basel III agreement, which comes into force on June 28, except for the UK, is also being closely watched by the gold experts.

"There is going to be volatility for the next few weeks. I would like to see that volatility calm down and gold test $1,800," Millman said. "Don't expect a major immediate reaction to Basel III. These were agreed upon years in advance, so the new regulations shouldn't sneak up on any of the banks."

The game-change for gold would be when Basel III starts impacting the UK, which could be in January of next year, Millman added.

"That is a game-changer because so much gold is stored and traded in London. The bullish side of the argument is that it would force banks to have allocated gold accounts. They would have to buy physical gold rather than trade unallocated accounts. The bearish side is that you would see a lot of banks exiting the precious metal space and stop trading gold."

Data to watch

The big event next week will be the U.S. nonfarm payrolls report scheduled to be released on Friday.

"With inflation pressures looking set to remain elevated for longer than policymakers initially thought and the economy continuing to boom, the main disappointment is the slower than hoped-for recovery in jobs. This will make the June U.S. labor report the key focus for markets next week," said ING chief international economist James Knightley.

Market forecasts are calling for 675,000 new positions to have been created in June. Any disappointment on that front will be bullish for gold, noted Melek.

Other datasets to keep an eye on are Tuesday's CB consumer confidence, Wednesday's pending home sales and ADP, as well as Thursday's jobless claims and ISM manufacturing PMI.

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