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Gold price wants clarity after Powell's hawkish stance - analysts

Kitco News

(Kitco News) As markets come to grips with a more hawkish Federal Reserve and omicron fears, can gold find its safe-haven appeal next week? The focus in December will be the Federal Reserve's monetary policy meeting, according to analysts.

After a turbulent week in gold and the U.S. equities, the markets were hit with a mixed employment report from November. Despite the big miss in the headline number, the details were quite optimistic. The latest data showed the U.S. economy only adding 210,000 jobs last month versus the expected 535,000. 

"Algorithms first saw the big headline miss, and gold popped. But as analysts read the report, it was fairly positive. Minority employment rose, and the participation rate increased. That showed labor market recovery heading in the right direction. Overall, the report was still in line with the Fed's goal to accelerate tapering," OANDA senior market analyst Edward Moya told Kitco News.

Next week, the inflation report will be the critical data point determining just how aggressive the Fed could get.

Fed Chair Jerome Powell told the U.S. Congress this week that the central bank will be considering wrapping up tapering a few months earlier, citing more problematic inflation. Powell also retired his "inflation is transitory" phrase, noting that the threat of persistently higher inflation has grown. 

Gold market is ugly with no clear price direction

"Inflation number next week could see the Fed increase pace by $5-$10 billion. This is why a lot of traders are anticipating some dollar strength to last a little bit longer, and that's why gold is stuck below $1,800 an ounce," Moya said.

Also, the Fed meeting on Dec. 15 looms large, especially considering that the U.S. central bank could be making a policy mistake, said Gainesville Coins precious metals expert Everett Millman.

"Gold has been up and down because of the uncertainty that the Fed has introduced with a more aggressive in tapering stance. Markets are unsure that it is the right expectation. Everything seems to be coming back to the Fed. There's widespread volatility across markets," Millman told Kitco News. "I've been talking a lot about the Fed potentially making a policy mistake. And Powell commenting on accelerating tapering might have already been that mistake. Gold is on its back foot trying to react."

Important to keep in mind that the last month of the year is challenging to trade, noted Moya, warning of thin trading and unexpected catalysts.

"We are coming to year-end, and we could see some major repositioning as far as profit-taking and thin conditions. You might see investors really lock in some of their profitable trades. There is fear that when you are beyond peak monetary and fiscal support, you will see a pullback. That could lead to a major stock market selloff," Moya said.

Millman also reminded investors that the expiration of the December gold futures contract is approaching, stating that "any time we are near that, we can expect more volatility."

Both Moya and Millman anticipate that gold will be able to sustain a more convincing rally at the beginning of next year, as the Fed situation clarifies.

"Longer-term, you are not seeing real yields really improve. The gold market is going to have a major move once there is a strong consensus on when that first rate hike will happen and whether it will be two or three within the first year. Once that is priced in, that is when you'll see gold attract some flows," Moya explained.

Levels to watch

Gold is ending the week relatively flat, with February Comex gold futures last trading at $1,783.90, up 1.20% on the day.

Looking at the technical picture, support is at $1,770 and then at $1,750 an ounce. And resistance remains at the $1,800 an ounce level.

"If the price of gold breaks below $1,750, we could see further losses. The $1,680 could come into play. That is the low for this year," Millman said. "The key is to watch whether or not gold can keep making those higher lows. That is one thing I am encouraged by — gradual building of positive momentum."

For now, the market is in the wait-and-see mode in terms of inflation and the omicron variant, noted Moya.

"It is going to be a choppy period. There is still a lot of optimism that we won't have the same number of lockdowns as at the beginning of the pandemic, but some states will struggle. Gold might consolidate between $1,750-$1,800 leading up to the inflation report and the Fed meeting," he added.

Next week's data

On the radar next week will be the U.S. jobless claims on Thursday and the inflation report on Friday.

"The most important data point will be November consumer price inflation. Rising gasoline, housing and second-hand car prices will be the big movers, but growing evidence of rising corporate pricing power is also likely to be evident," said ING chief international economist James Knightley. "This is likely to leave annual rates close to 7% for headline inflation with the potential for core inflation to beak above 5%."

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