Gold prices still not ready to break above $2,000, U.S. debt is a growing issue
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(Kitco News) - Cooling inflation pressures and growing weakness in the U.S. labor market have caused markets to start to question the Federal Reserve’s plan to keep interest rates in restrictive territory for the foreseeable future, which has provided new momentum for gold; however, sentiment still isn’t bullish enough to drive prices back above $2,000 an ounce.
Although gold prices are ending the week with solid gains, prices have dropped from Thursday’s highs. December gold futures last traded at $1,984.40 an ounce, up more than 2.4% from last Friday’s three-week low.
Although analysts remain bullish on the gold market as it enters its seasonal strong point, some have said that a new catalyst is needed to get prices to their ultimate target of new all-time highs.
Adam Button, chief currency strategist at Forexlive.com, said the gold market is ripe for a break above $2,000 an ounce. Still, he added that the market might need to see weaker economic data to generate sustainable momentum.
He noted that the drop in inflation, with U.S. CPI dropping to 3.2% in the 12 months to October, shows that the Federal Reserve has room to leave interest rates unchanged, but added that there is no urgency for the central bank to cut rates anytime soon.
“The Federal Reserve is going to hold on longer than they really need to, but that just means they will have to make bigger rate cuts, and I think those expectations are supporting gold prices,” he said.
Barbara Lambrecht, commodity analyst at Commerzbank, said that while it’s unlikely the Fed will raise interest rates in December, she is also not expecting to see a rate cut anytime soon, which limits gold’s upside potential.
“The recovery on the gold market is hardly likely to continue,” she said. “We only expect gold to lastingly exceed the $2,000 mark in the middle of next year.”
At the same time, with little economic data to be released next week, investors are unlikely to get a solid picture of the health of the U.S. economy. Markets will also be closed Thursday for the U.S. Thanksgiving holiday.
More than just interest rates driving gold
Although the Federal Reserve’s aggressive interest rate stance garners significant market attention, some analysts have said that investors should also be paying attention to its balance sheet as the global financial market grows more concerned about the size of the U.S. debt.
Next week, the U.S. Treasury Department will auction off 20-year bonds and 10-year Treasury Inflation Protected Securities. These two auctions come on the heels of a disappointing 30-year note auction last week.
Analysts have pointed out that U.S. sovereign debt is becoming less attractive as the debt continues to grow.
“A debt crisis in the U.S. would be extremely bullish for gold,” said Button, “But the U.S. has a lot of levers it can pull on to sustain a lot of debt, so it's unlikely we will see a crisis anytime soon.”
Now is the time for investors to be patient
Michele Schneider, director of trading education and research at MarketGauge, said that although gold isn’t ready to break through $2,000 an ounce, it doesn’t mean it has lost its luster.
She said investors must be patient as she expects the market to consolidate. She noted that although inflation continues to fall, the economic threat of higher consumer prices is only delayed. She pointed out that the economy is following the same pattern from the 1970s and 1980s.
Inflation in the mid-1970s rose to 12% and then dropped sharply to around 5% by 1977. However, after that trough, inflation spiked to 14.5% in mid-1980. The Federal Reserve has said this is the scenario it is trying to avoid, but Schneider said that this is unlikely.
She explained that the biggest difference between now and the 1970s is the size of the U.S. debt. She said the Federal Reserve can’t afford to push interest rates high enough to tamp down long-term inflation pressures.
Schneider noted that U.S. debt issues also mean the government can’t afford to provide any fiscal relief when the recession hits.
“There is nobody who wants to buy U.S. debt and the Federal Reserve is going to be forced to buy the debt,” he said. “This new [quantitative easing] is what pushes gold to all-time highs. The gold market is just waiting for the Federal Reserve to make a misstep in monetary policy.”
However, Scheinder added that gold’s big move to new all-time highs might not happen until 2024 or 2025. Until then, she said that investors should continue to play the range in gold.
“You buy gold when it starts to look bad and sell it when it starts to look strong. Until the crisis hits, gold is just going to bide its time,” she said.
Economic data for next week:
Tuesday: Existing home sales; FOMC minutes
Wednesday: Durable goods, weekly jobless claims
Friday: Flash PMI