(Kitco News) Even though gold is looking to end the week above $1,800 an ounce, there is a high chance for a move lower as the Federal Reserve can still surprise on the hawkish side, according to analysts.
Despite the rally, the precious metal is trading essentially flat on the week, with February Comex gold futures last at $1,815 an ounce.
All eyes are now on the November inflation figure after the Producer Price Index (PPI) rose more than expected.
The CPI print is scheduled to be released on Tuesday, with analysts warning that inflation will likely remain elevated and be slow to decelerate.
"Next week, the CPI is anticipated to trend in the right direction, but it won't come down as quickly as many anticipate. I'm partially bearish on gold next week," OANDA senior market analyst Edward Moya told Kitco News. "Post-Fed, gold could be reeling but then eventually settling higher. Looking at a potential downside for next week, but that will be short-lived."
What to expect from the Fed
The Fed will announce another rate hike on Wednesday, with markets looking for a slower tightening pace of 50 bps versus 75 bps. But a slower pace does not necessarily mean the U.S. central bank is pivoting away from its plan. Fed Chair Jerome Powell has already warned that rates might have to stay higher for longer.
Investors will be paying close attention to the updated dot plot, economic projections, and the language Powell uses during the press conference.
"The new dot plot and new economic forecasts are risk factors for gold. Message from Powell and other Fed speakers has been that the pace of hikes may slow, but we may still see a terminal rate that is somewhat higher," TD Securities commodity strategist Daniel Ghali told Kitco News.
Ghali added that gold has been benefiting from a short-covering rally that is now close to its end. "We've seen a substantial amount of short-covering, which contributed to the rise in gold prices. As the year draws to a close, money managers are reluctant to put on a substantial amount of risk on the table. From this point on, most short covering is now in the rearview, and prices are still at risk of a more hawkish Fed on the horizon," he noted.
How investors interpret the Fed's messaging will also be important, Moya explained. "It will be interesting to see how investors feel about the Fed. Will this be the last hike followed by a pause? You could still make a case that they could go another 50 bps in February. And then, in March, it would be a toss-up. It still seems that more tightening is warranted," he said.
Aside from the macro data, geopolitics might start playing a bigger role for gold again as the war in Ukraine could escalate further, Moya warned.
"That is something we need to stay on top of. Risks of the war escalating further are once again circulating. That is going to give gold some safe haven value," he said.
Russian forces stepped up activity on Friday, shelling the entire front line in the Donetsk region of eastern Ukraine. Meanwhile, Russia's President Vladimir Putin accused the West of "exploiting" Ukraine and using its people as "cannon fodder."
Gold price levels to watch
For gold to make another significant move higher, it needs to cross its 200-day moving average at $1,821, RJO Futures senior market strategist Frank Cholly told Kitco News. "The $1,821 level is very critical. If the market can close above it, then I get bullish. Right now, gold is struggling to get above the 200-day moving average. This is also where it topped out last week," he said.
The outlook on where rates will be next year is what will give gold its direction next week, Cholly added, noting that he is keeping a close eye on the U.S. dollar as well.
Ghali said that more buying would come in at the $1,830 an ounce level, while a drop to $1,740 an ounce could trigger a selloff.
Moya sees $1,775 as key support for gold and $1,830 as an upper boundary in the current price range.
Data to watch next week
Tuesday: U.S. CPI
Wednesday: Fed rate decision with FOMC economic projections
Thursday: ECB rate decision, Bank of England decision, U.S. retail sales, U.S. jobless claims, N.Y. Empire State manufacturing index, Philly Fed Manufacturing index
