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Gold price 'fragile' at current levels, eyes on Fed uncertainty - MKS PAMP

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(Kitco News) - The gold market is "fragile" after it failed to hold the $1,850 an ounce level. And more defensive-type trading could be in store if there is uncertainty around the Federal Reserve's intentions, said MKS PAMP.

All eyes are on Fed speakers and the FOMC meeting minutes from February monetary policy meeting. Markets have been taken aback by solid macro data, stubborn inflation, and the possibility of the fed funds rate going higher and staying there for longer.

"The resilience in U.S. data (payrolls/inflation/retail/PMIs) has driven a renewed fear over a 'higher for longer' Fed, which has kept risk/equities relatively buoyed while slamming gold and thus other precious metals throughout February," said MSK PAMP metals strategist Nicky Shiels.

The gold market went from a rally in January on expectations that the Fed will soon pause its tightening cycle to February's selloff based on the apprehension surrounding the U.S. central bank's next moves.

"If there is more uncertainty around the Fed’s trajectory, the defensiveness (selling rallies) will continue," Shiels said Tuesday.

There is also talk of this idea of "no landing," which is weighing on the gold price. "Neither a hard nor a soft landing, the newly-coined 'no landing' outcome, suggests the economy will avoid a recession entirely," Shiels explained.

This outcome would see the labor market remaining robust, inflation staying elevated, the U.S. economy growing, and the Fed maintaining its hawkish bias. "A no landing 'event' = nonstop Fed hikes = higher risk of a 'hard landing' = bearish industrial commodities/metals but also gold," Shiels noted.

MKS' base-case scenario projects inflation and the U.S. economy finally getting hit with the lagged effects of the Fed's tighter monetary policy in the second half of 2023. "If we are/were bullish at $1,950, we *should be* constructive at $1,820/50, but conviction is now lower (ie: a milder bullish trajectory which is very data dependent)," Shiels said.

In the meantime, gold is looking for an identity. In January, the precious metal traded higher on the idea that inflation is coming down and the Fed is looking to pause its historic tightening cycle.

"Now it is trading very defensively and struggling to gain an identity at current levels; the bullish bias was broken/tested, and gold is technically fragile after it failed to hold $1,850," Shiels pointed out.

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And geopolitics, while at the top of media headlines, is not driving the price action in gold at the moment.

"That is in sharp contrast to the structural (de-dollarization) & geopolitical forces driving price action >$1900 in January," Shiels said. "What could potentially place further support under gold is equity softness … U.S. equities have been trading 'good data is good news' but now seem to be taking the 'higher for longer' hit precious metals largely shouldered all month."

The good news for the bulls is that gold might not have too much further to fall since there is a physical demand price floor that would limit the selling, according to Shiels.

"There are still decent physical premiums across China, Turkey and India, indicative of decent demand, but its also policy-driven, which impacts regional supply & thus keeps premiums abnormally elevated," Shiels said.

The first price floor for gold and silver comes in at low $1,800s and $21.50, respectively. Then, physical demand really kicks in at $1,780 in gold, which is around the 200-day moving average, and below $21 in silver.

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