Where is gold's summer rally? This price level is needed for breakout
(Kitco News) If gold can't close around the $1,820 an ounce level, a breakout summer rally could be out of the question for the precious metal, with some analysts even warning of a pullback to $1,700 an ounce.
Gold closed Friday's price action with the fourth weekly gain in a row, up 1.5%, with December Comex gold futures last trading at $1,818.10 an ounce.
Many analysts expected gold to see a significant rally after the slowdown in inflation. The CPI numbers came in below expectations this week, with the annual inflation running at 8.5%, following June's 9.1% print. But gold could not capitalize on the immediate gains the precious metal saw.
"The CPI data was lower than many had expected. And that was primarily driven by a drop in energy," TD Securities global head of commodity strategy Bart Melek told Kitco News.
Melek agrees with the Federal Reserve speakers this week, who pushed against a Fed pivot from aggressive rate hikes.
"There continues to be a significant issue surrounding inflation. Chances are that inflation will continue to stay beyond Federal Reserve's preference," Melek said.
The problem is that energy prices could continue to fall in the short term, but the inflationary pressures could return once colder weather kicks in.
"Past August, energy will stop being a source of disinflationary pressure. As winter comes, demand increases. Those price declines we've seen in energy might subside. It is very unlikely that the Fed will be comfortable tilting policy towards lower rates as many had expected in early 2023," Melek noted.
For gold, this means there is still a significant risk of prices retreating back to $1,700 an ounce, Melek warned. "Based on Fed commentators, the central bank is of the view that inflation is a problem and a slower economy will not deter them from continuing to take action," he said.
Also, there has been a risk-on rally building in equities, which has been taking money flows away from gold, Blue Line Futures chief market strategist Phillip Streible told Kitco News. "Action in U.S. equities have sparked the FOMO buying again, including meme stocks," Streible said.
And those who made money in precious metals in the latest rally might be looking to roll these earnings into other asset classes with significant upsides, like momentum stocks.
Streible pointed out that he is cautious going into next week after gold could not breach $1,850 an ounce.
"Earlier in the week, we saw the dollar fall and yields back off. But gold wasn't able to break through. The precious metal should be at $1,850 — a fair value on gold. The fact that we haven't been breaking out to the upside and regaining momentum makes me a bit cautious," he said.
Gold needs to close $1,825 to reignite new bullish momentum, Streible added. "Otherwise, the chart looks a bit tired here from the technical perspective," he noted.
First support is around the 50-day moving average at $1,783, and resistance is at $1,830 an ounce, Melek said. If $1,783 doesn't hold, then $1,772 comes into play, he added.
Next week's data
Next week's focus will be the FOMC minutes from the July meeting, U.S. retail sales, and housing data.
Monday: N.Y. Empire State manufacturing index
Tuesday: Building permits and housing starts, industrial production
Wednesday: Retail sales, FOMC meeting minutes
Thursday: Jobless claims, Philadelphia Fed manufacturing index, existing home sales