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Gold price to focus on new decades-high inflation numbers next week - analysts

Kitco News

(Kitco News) The gold market will pay close attention to the U.S. inflation numbers in what will be a very data-heavy week. Analysts are looking for prices pressures to reach new four-decade highs of well above 8% in March.

The big macro news still being digested by the gold market is the FOMC March minutes revealing the Fed's plan to reduce its balance sheet by $95 billion a month, which will likely be kicked off in May.

The Fed also discussed 50-basis-point rate hikes at upcoming meetings, which the market is already pricing in for May. "Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified," the minutes said.

This is why the March inflation data, which is scheduled to be released on Tuesday, will be one of the key releases to monitor. Market consensus calls expect to see annual inflation at 8.4% — the new four-decade high.

"The March consumer price inflation release … is expected to jump again due to the surge in gasoline prices. The national average was $3.50/gallon in February versus $4.19/gallon in March. Food prices have been rising sharply too while supply chain strains, rising commodity prices, and higher labor cost inputs in an environment where companies have decent pricing power mean broad-based contributions," said ING chief international economist James Knightley.

High inflation data will keep pressure on the Fed to hike by 50 basis points in May. However, the gold market remains unconvinced the Fed can maintain its aggressive tightening throughout 2022. This is why the precious metal held up so well, with June Comex gold futures last trading at $1,945.90, up more than 1% on the week.

"The market is now focused on whether the Fed's accelerated tightening path will eventually force the central bank to choose between continuing to fight inflation aggressively or slowing down because of growth concerns. That is providing long-term optimism for gold investors," OANDA senior market analyst Edward Moya told Kitco News.

Growth risks will only rise from here, Moya said, pointing to a slate of economic data releases coming up in April.

"As this war in Ukraine drags on, it will continue to feed into this inflationary focus the markets have. There are a lot of reasons to flee into safe havens right now. And even though it is typically bad for gold when Treasury yields go up so high, the precious metal is hanging in there quite well," Moya said. "We should anticipate there could be further shocks to a wide range of commodities."

Deutsche Bank's recession call: U.S. economy to take 'major hit' as Fed tightens

In light of this environment, it is also hard to make a bull case for U.S. equities, he added. "The take on Wall Street is that we are going to move sideways for quite some time. Gold is likely to remain steady if not become more constructive and eventually grow as risks intensify."

Some gold investors will continue to have a wait-and-see approach in terms of the Fed, said TD Securities head of global strategy Bart Melek.

"The Fed is ready to tighten conditions up here. That is largely priced in. What does it mean for gold? It implies that we are going to be guarded here. Will the Fed really tighten monetary policy? Will it contract? So the market is neutral — it thinks rates will go up but won't necessarily be overly restrictive," Melek told Kitco News.

There is a good chance the Fed will introduce some of the bigger rate hikes this spring and at the beginning of the summer to try and convince the market they are not behind the curve.

"Gold is performing well even though we are talking about a tightening cycle. It is up 7% year-to-date. Some gold people may be thinking that after the initial action, the Fed may not be as committed. Could very well be that inflation doesn't come off as quickly as Fed is protecting," Melek noted.

According to Melek, gold's support and resistance levels for next week are $1,920 and $1,967 an ounce. Moya is watching the $1,970 an ounce as the high and $1,900 as the low for next week.

Next week's data

Tuesday: U.S. CPI

Wednesday: U.S. PPI, BoC rate announcement

Thursday: ECB rate announcement, U.S. retail sales, jobless claims

Friday: N.Y. Empire State manufacturing index

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