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Gold price is watching Fed's tapering talk with Powell's testimony on the docket next week

Kitco News

(Kitco News) Gold is holding above $1,800 an ounce as all eyes turn to Federal Reserve Chair Jerome Powell's semi-annual monetary policy testimony to Congress next week, with markets searching for new tapering clues.

The precious metal is wrapping up the week with a gain of 1.4% as August Comex gold futures trade around the $1,808 level.

Powell's upcoming testimony on Wednesday is the event to watch next week, according to analysts, who cite markets' anticipation of the Fed clarifying its tapering timeline.

"Given the supply-side strains within the economy, the likely timing of policy tightening is being brought forward, and [Powell] may offer clearer hints that a tapering of QE asset purchases will start this year," said ING chief international economist James Knightley.

Next week, multiple data reports will also help the markets gauge where the U.S. economy is and how hawkish the Fed will be going forward. On the radar are June's inflation numbers and retail sales figures, which will be released on Tuesday and Friday, respectively. Other key datasets to monitor are Wednesday's PPI numbers and Thursday's jobless claims, Philadelphia Fed manufacturing index, and NY Empire State manufacturing index.

However, given the spread of the COVID-19 variants across the globe and tame economic numbers coming out lately, some analysts do not see central banks, including the Fed, turning aggressively hawkish any time soon.

"There was a lot of focus on global growth concerns this week coming from the spread of the COVID-19 Delta variant around certain countries. A lot of the world is nowhere near the end of this pandemic. That is going to support more accommodative monetary policies throughout much of the world," OANDA senior market analyst Edward Moya told Kitco News.

The FOMC meeting minutes released this week also did not signal that the Fed has turned hawkish, said TD Securities head of global strategy Bart Melek. All the Fed said was that it was unwilling to sacrifice price stability at the alter of full employment, he pointed out.

"The Fed is likely to remain accommodative, especially in light of the spreading Delta variant, inflation pressures abating (including a significant drop in lumber prices), and problems with employment data, including the low participation rate," Melek said. "There's no reason to think that the Fed will get particularly aggressive on the interest rate front."

That is good news for gold, Moya added. "It looks like we'll see tamer pricing reports coming next week out of Europe and the U.S. That is going to keep the gold trade going strong. Gold is going to benefit from the Fed that will likely remain accommodative," he said.

Signs of central banks remaining accommodative around the globe are already here. China, for example, said on Friday that it would cut the reserve requirement ratio for most banks by 50 basis points, effective from July 15. This will free up around $154.19 billion in long-term liquidity that will boost China's slowing post-COVID economic recovery.

"This is the story markets should be focusing on," Moya said. That is a big step back for a country that has been leading the economic recovery against COVID-19. You are going to see this theme continue around the world."

Global growth concerns and further accommodation by central banks are the two key reasons why Moya is bullish on gold going forward.

"Growth worries have some banks pumping their breaks as far as tapering goes. There's more cautiousness out there. The slowdown in China's GDP supports the argument that we are still fighting this pandemic. This could accelerate risk aversion, and if that happens, gold should see more safe-haven flows," Moya explained.

The U.S. Treasury yields have also started to worry the markets as the 10-year yield dropped below 1.3% this week. At the time of writing, the 10-year yield was back up at 1.35%.

"There is concern out there that lower yields signal significantly reduced growth expectations," Melek said. "Gold responded positively to lower yield."

For gold, an accommodative Fed means a chance to get back to $1,900 an ounce within the next few months, Melek added.

Range-bound trading is also a high probability in the near-term as traders head for summer holidays, said Saxo Bank head of commodity strategy Ole Hansen.

"A lot of traders will be shutting down their computers for summer holidays, so investors can expect to see a lot of noise in the marketplace for at least the next month. I wouldn't want to sell gold, but you don't want to aggressively buy either," Hansen said.

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