(Kitco News) Gold is quickly becoming the asset to watch as inflation starts to slow and the crypto market goes through another meltdown phase. The precious metal is up more than $80 — its best weekly performance since July 2020. But analysts are not calling for a new bull market just yet.
The spot gold price began the week at $1,681 an ounce and was last trading at $1,765. This is the best performance since the week ending July 24, 2020, when gold rose more than $90 in the buildup to a new record high above $2,000 an ounce reached later that year.
December Comex futures were last trading near daily highs at $1,767.60 an ounce.
The strong turnaround comes after the latest U.S. inflation data showed price pressures slowing. The biggest takeaway for the markets was a possibility of a more flexible Federal Reserve in the coming months. The news sent the U.S. dollar lower, giving gold room to rally.
"U.S. consumer prices rose much less sharply than expected in October, thereby dampening Fed rate hike expectations, putting pressure on the U.S. dollar and causing U.S. bond yields to fall noticeably, said Commerzbank analyst Carsten Fritsch. "As a result, the gold price climbed to $1,760 per troy ounce to reach its highest level since the end of August."
Analysts have been eyeing a comeback in gold after seven consecutive months of losses — the longest losing streak in more than five decades. And gold finally moved on the combination of election headlines, hope that the Fed will slow things down, and China reopening.
"We had a breakout Thursday with a very positive close, and we are getting some follow-through Friday. For technical traders, this chart is still very strong. There is no reason for me to say it will turn around and go back down. We should find levels closer to $1,775-$1,800 before the market pauses," RJO Futures senior market strategist Frank Cholly told Kitco News.
The rally also coincided with another massive selloff in the crypto space, which saw Sam Bankman-Fried's cryptocurrency exchange FTX filing for Chapter 11 bankruptcy Friday. The event has a high-level contagion risk that will continue to impact the crypto space and the wider market in general.
Crypto volatility has a much broader reach this time around, which is why gold stands to benefit more than in the earlier months of this crypto winter.
"The circumstance in crypto compared to the summer months have changed. Investors are more worried than they were earlier this year. And the build-up of the amount of capital in the crypto market is quite big," Gainesville Coins precious metals expert Everett Millman told Kitco News. "And gold has that traditional role — it is trusted and considered a traditional safe haven."
Can gold breach $1,800?
Despite significant gains already posted in gold, analysts see room for the precious metal to move even higher, with Cholly highlighting the $1,830 an ounce as a level that's technically possible next week.
"There is still momentum here. We could see the market returning to $1,830 before gold runs into more heavy resistance. That is unless the Fed comes out and tries to talk things down a bit," Cholly said Friday.
Too early for a Fed pivot
For gold, it all comes down to how quickly the Fed pivot comes about. But analysts say it is too early for the U.S. central bank to start backtracking, which is why the precious metal must be patient a bit longer before seeing a renewed bull market sentiment.
"I am not convinced that we will see gold rise to $1,900 just based on the Fed signaling a more dovish tone and the collapse in the crypto market," Millman said. "We'll probably give back some of these gains, but as long as we hold above $1,700, we can see momentum going."
This is not the time for the Fed to pivot, added Cholly, noting that just two weeks ago, Fed Chair Jerome Powell told reporters that it was premature to change policy and that rates could go higher than expected.
"Inflation is slowing, so the Fed sees its intended results. And maybe it would make sense to slow down a bit. But the Fed would rather err on the side of overdoing the rate hikes than pausing too soon," Cholly pointed out. "I wouldn't be surprised to get some kind of Fed comment soon."
Cholly is expecting to see softer language from the Fed only at the beginning of next year. "It would be premature to talk about a pause. Powell can't just contradict what he said two weeks ago. I have a hard time seeing gold going to $1,900 or $1,950," he stated.
Next week's gold price action will get its direction mainly from the U.S. dollar — the most heavily weighted driver for gold's ability to continue to rally.
"The dollar is the main thing I am watching because we've seen such a big move. Does that trend continue? Is the dollar going to fall or hold? That will play a big role in whether gold can hold on to its gains," Millman noted.
Longer term, gold is looking to regain its hold above $1,700 an ounce and outperform most commodities next year, said Bloomberg Intelligence senior macro strategist Mike McGlone.
"The Fed rate-hike sledgehammer this year may have solidified the foundation for an elongated bull market in gold," McGlone said Friday. "Rapidly rising rates in 2022 and the steepest drop in the U.S. Treasury bond future since 1982 relative to its 200-week moving average could be forming a base for gold to resume what it typically does -- outperform most commodities."
Next week's data
Tuesday: U.S. PPI, NY Empire State Manufacturing index,
Wednesday: U.S. Retail Sales
Thursday: U.S. building permits and housing starts, U.S. jobless claims, Philadelphia Fed Manufacturing Index
Friday: U.S. Existing home sales
