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It's going to be a 'lively December' for gold price - Pepperstone

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(Kitco News) Gold is looking at potentially taking out $1,800 and having a great 2023, according to Australian Pepperstone.

Gold finally found momentum after seeing seven months of consecutive losses and registering a bottom near $1,620 an ounce.

On Tuesday, December gold futures reacted positively to the slower U.S. Producer Price Index and renewed geopolitical tensions after reports that a Russian missile crossed over to Poland and killed two people.

"We're seeing signs of consolidation before a potential test of $1,800/04 and beyond. Happy to hold a positive bias but would reconsider through $1739 and $1710," said Pepperstone's head of research Chris Weston. "It's been a frustrating year for gold investors, and there has been an opportunity cost with holding longs, especially as cash has emerged as a risk-free investment class."

In the short term, the conditions for gold are favorable, and the month of December is expected to be "very lively," according to Weston.

"Looking forward, we see that implied volatility (priced in the options market) has come off a bit, with XAU 1-month IV into 15.5%, but this seems fitting with implied volatility across asset class falling recently," he said in a note Tuesday. "This measure of gold's expected volatility does take into consideration the US JOLTS job openings report (1 Dec AEDT), US non-farm payrolls (3 Dec) and Nov U.S. CPI inflation report (14 Dec) but is yet to fully incorporate the December FOMC meeting (15 Dec). Either way, while the market pares back expectations of volatility, I do see a floor in vol given this upcoming tier1 event risk, and I expect this period to get very lively for gold - as it will the USD, rates and the NAS100."

A key driver to watch as markets head into the year-end is the U.S. dollar, which has recently given room for gold prices to rally after weighing heavily on the precious metals throughout 2022.

"Given gold's rise vs. U.S. real rates, we can see it's the USD that is the key determinant, and with the wild selling activity taking the DXY below 106, XAU has benefited. One can write a lengthy thesis on the USD, but under the USD' smile' theory, a better feel on global growth is certainly helping, notably with USDCNH coming off so aggressively as China pivots on its Covid plans – we can also see an end to the Fed's hiking cycle, with many feeling that March 2023 could be the date when we get a prolonged pause in its hiking plans," Weston explained.

A big positive for the gold price is a potential slowdown by the Federal Reserve in December, Weston added. But a lot will depend on the November inflation report, which will be released in December.

"The next US CPI print (14 Dec) will be a blockbuster – not just because we get the FOMC meeting the day after, but it could confirm that the U.S. inflation rate may be falling not specifically because of tighter financial conditions through QT and rate hikes, and that still need to feed through the real economy. But there is a belief that while supply chains are easing, high prices are feeding on themselves, and inflation is falling on more organic factors – high prices being the cure for high prices – a factor which could be confirmed in Nov U.S. CPI report, and that could radically increase the need to pause on hikes after we see a 50bp in the December FOMC – a gold positive," said Weston.

According to the CME FedWatch Tool, markets are pricing in an 85.4% chance of a 50-basis-point rate hike in December, which is a slowdown from its 75bps pace that was used during the last four meetings.

"Positioning in gold futures is net short, and options skew is neutral – we head into a seasonally strong time to be long U.S. equities, and if equities do run hot into year-end, funds will remove USD hedges, and this should boost XAU. An open mind pays, and clearly, if the Nov CPI print comes in hot then gold could get slammed, but that is weeks away," Weston noted.

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