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This is the next big catalyst for gold price

Kitco News

(Kitco News) Gold is looking at its third consecutive week of losses after January's rally, which saw its best start to the year in over a decade. And now all eyes shift to next week's U.S. inflation report, with analysts saying it could be the next big catalyst for the precious metal.

After surging to $1,975 an ounce last week, April Comex gold futures are now trading at $1,870.70 an ounce, down 5.3% from that peak.

"The dollar is reverting, and the Fed remains hawkish, which is weighing on gold," RJO Futures senior market strategist Frank Cholly told Kitco News.

Gold's bullish sentiment began to change after a strong employment report out of the U.S. last week showed job gains of 517,000 in January.

This was followed by Federal Reserve Chair Jerome Powell confirming markets' worries that if the U.S. economy continues to surprise on the upside, the central bank would be forced to raise rates higher than anticipated.

Powell brought out just the right amount of "Fed speak" when he appeared at the Economic Club of Washington, D.C., Tuesday. On the one hand, he reiterated that the "disinflation process" has begun. On the other hand, he warned that if data continue to come in stronger, the Fed will move peak rates higher.

"It really fits well with the definition of what we often call Fed speak, which is a strategy by the chairman of the Fed to speak out of both sides of their mouth so that the markets get both signals," Gainesville Coins precious metals expert Everett Millman told Kitco News. "The hope is that things remain steady and both sides have something to latch to. That's exactly what Powell did. The most likely outcome here is that the Fed continues along its rate hike path until the economy falters."

What to watch with the CPI report

Next week, the gold market is gearing up for a number of key macro releases. Tuesday's CPI report is the one to watch as it could be the next big catalyst for the precious metals space, TD Securities senior commodity strategist Daniel Ghali told Kitco News.

"We need a substantial catalyst for subsequent selling activity to ensue in gold. It could come in the form of next week's CPI data. At the same time, if the CPI won't be a big enough shock, gold won't see a lot of selling activity into next week," Ghali described.

Even if the CPI report continues to show slowing inflation, the Fed won't be ready to take its foot off the gas yet, said Cholly. "Gold has a little more downside," he said.

Market consensus calls are projecting annual inflation to slow to 6.2% in January from December's 6.5%.

"We think that inflation will fall by more than the consensus, which should give a lift to commodity prices as it will allay fears of a more hawkish Fed and higher U.S. interest rates for longer," said analysts at Capital Economics.

Ghali also pointed out that a large cohort of investors still sees gold as overvalued, but it is unclear who would be willing to sell based on the flow perspective.

The recent central bank gold buying has supported gold, and the market is waiting to see if that trend will continue.

The participants that have driven the gold rally above $1,800 have been central banks and short-covering, Ghali said. "If that trend continues, then I would feel more comfortable with gold holding above $1,800," he noted.

The World Gold Council amended its Gold Demand Trends report this week, stating that central bank gold buying was at a record high in 2022, with 1,136 tonnes purchased. 

Gold price levels

Gold's potential trading range is pretty wide at the moment, with strong support currently at $1,800 an ounce and resistance at $1,900, Ghali noted.

Cholly is looking at the $1,850-$1,855 range. "Moving averages are important. We are sitting at a 50-day right now. And the 200-day is at $1,812. Somewhere between these two marks, there is market equilibrium. Gold will consolidate and recover from those levels," he said.

Key data next week

Other data to keep an eye on include U.S. retail sales, the Producer Price Index, and industrial production.

"January activity data is going to be strong throughout. The contrast between the weather in mid-late December, where it was incredibly cold, versus a very mild January, couldn't be more stark," said ING chief international economist James Knightley. "This means there will be delayed consumption, plus better weather means more people out and about, which in all likelihood will lift January spending. We already know auto sales were very strong and that will lift retail sales mightily on its own."

Tuesday: U.S. CPI

Wednesday: U.S. retail sales, N.Y. Empire State manufacturing index, U.S. industrial production

Thursday: U.S. PPI, U.S. jobless claims, U.S. housing starts and building permits, Philly Fed manufacturing index

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