(Kitco News) - After gold's strong start to the year, momentum is beginning to fade as the $1,880 level has proven to be stubborn resistance.
However, sentiment remains reasonably bullish in the marketplace as some analysts expect weak inflation data to drive prices above $1,900 an ounce by the end of the week.
Thursday, U.S. Labor Department will release its much-anticipated Consumer Price Index and economists expect that prices significantly cooled in December. Annual inflation is forecasted to rise 6.5%, down from 7.1% reported in November.
"A further cooling in prices in December and lower bond yields would be a welcome development for zero-yielding gold. Looking at the technical picture, bulls remain in a position of power with the next key level of interest found at $1900," said Lukman Otunuga, senior research analyst at FXTM.
In an email to Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank, said that while gold has a chance of popping above $1,900 an ounce ahead of the weekend, he does see some downside risks starting to emerge.
Hansen explained that a soft CPI print could already be priced into the market.
He added that a rally in gold Thursday could lead to some profit-taking after a solid start to the year. Hansen said that at current levels, investors should not chase the market and those who have tactical long positions might want to reduce their exposure.
"Gold's price action during the past week has, in my opinion, showed us the correct direction for 2023, but while the direction is correct, I believe the timing could be wrong," he said. "While momentum supports technical and speculative buying - for now primarily through short covering - activity in ETF market from longer-term investors remain tepid, raising the short-term risk of a correction."
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Carsten Fritsch, precious metals analyst at Commerzbank, also warned that gold investors could face a difficult path in the near term as markets try to adjust to falling inflation expectations even as the Federal Reserve maintains its aggressive stance on monetary policy.
There is already a substantial discrepancy between the expectation of market participants regarding the Fed's monetary policy this year and what the Fed is continuing to communicate," Fritsch said in a note Tuesday. "According to the Fed Fund Futures, the market anticipates a rate peak of less than 5% in the spring and the first rate cuts to follow towards the end of this year. The Fed envisages a rate peak of over 5%, on the other hand, and has so far unequivocally ruled out any rate cuts this year."
Fritsch added that if the market starts to believe the U.S. central bank's monetary policy forecasts, gold could see some renewed selling pressure.
"We would therefore warn against assuming that the current price rise will continue for much longer," he said.
However, despite near-term volatility, the German market analyst maintains his long-term bullish stance.
"This does nothing to change our fundamentally positive view of the prospects for the gold price: we also expect that the Fed will lower interest rates at the end of the year because the inflation rate will by then have fallen sufficiently and the labour market is also unlikely to be as tight as it is now," Fritsch said. "We still envisage a gold price of $1,850 per troy ounce at the end of 2023, though the upside risks to this forecast have increased recently."
