Safe-haven demand, shifting market expectations drive gold prices above $1,700, but CPI remains major risk
The gold market is seeing some follow-through buying Tuesday, with prices pushing solidly back above $1,700 an ounce, hitting nearly a five-week high. December gold futures last traded at $1,719 an ounce, up 2.3%.
Silver is outperforming gold as it sees a solid move above $21.50 an ounce. December silver futures last traded at $21.69 an ounce, up 3.69% on the day.
Tuesday's rally follows Friday's short-squeeze that pushed gold prices up 3% and silver prices up nearly 7% ahead of the weekend.
Ole Hansen, head of commodity strategy at Saxo Bank, noted that gold's break above $1,680 is creating new momentum for gold. He also said that a breakdown in crypto markets is adding to gold's safe-haven allure.
Some analysts see Tuesday's move as a continuation of Friday's short-covering rally as trade data from the Commodity Futures Trading Commission shows bearish speculative positioning near its recent four-year highs. However, other analysts have said that the rally could reflect a shift in market expectations as the threat of a global slowdown grows.
The inverted 2-year/10-year yield curve remains a significant recession gauge for many economists and market analysts; it remains at its widest level in 40 years.
Daniel Pavilonis, senior commodities broker with RJO Futures, said that along with growing recession fears, some whisper numbers on Wall Street are calling for weaker-than-expected inflation data on Thursday. Currently, markets expect the U.S. Consumer Price Index to show an annual rise of 7.9% anything lower than that could be positive for gold.
Expectations of softer inflation numbers are also shifting the outlook on the Federal Reserve's December monetary policy decision. According to the CME FedWatch Tool, markets see a nearly 57% chance of a 50 basis point move next month.
"It looks like bond yields want to go lower as markets see the Fed slower the pace of rate hikes into next year," said Pavilonis. "That is weighing on the U.S. dollar and helping gold prices."
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The U.S. dollar index is trading near its lowest level in seven weeks as it drops below 110 points.
Although the gold market has seen some significant gains from last week's two-year low, many analysts note that prices have just pushed into neutral territory. Many analysts have said that gold prices need to get above $1,735 an ounce before it attracts sustainable bullish momentum.
Some analysts are also warning investors not to chase the market as the Federal Reserve maintains its aggressive monetary policy stance.
"When the Fed is done raising rates, gold and bonds will be the best trade in markets," said Philip Streible, chief market strategist at Blue Line Futures. "But we just don't know when the Fed will be done."
Pavilonis added that although market expectations are shifting, they can easily swing back if inflation proves to be hotter than expected.
"The big caveat for the gold market remains wage growth because this will determine just how sticky inflation will be," he said. "If inflation is going to be pretty sticky, then the Fed will have to maintain its aggressive stance longer than expected."