(Kitco News) Gold is testing support at $1,850 an ounce and losing the battle. The gold market is reacting to robust economic data, which suggests more tightening by the Federal Reserve.
The highly-anticipated macro releases from this week showed that inflation is cooling slower than expected while the U.S. economy remains fairly strong. And that could justify more rate hikes by the Fed.
"The precious metal is trading below $1850 thanks to the sticky U.S. inflation print and conflicting views from Fed officials. Given how the dollar is likely to draw strength from expectations around the Fed staying hawkish for longer, this could translate into more pain for zero-yielding gold down the road," said Lukman Otunuga, senior research analyst at FXTM.
Retail sales from January rebounded sharply, rising 3% versus the expected 1.8%. Also, New York state's factory activity contracted in February for a third consecutive month, but at a much slower pace.
This comes after U.S. inflation data showed annual CPI at 6.4% in January versus the expected slowdown to 6.2%.
"While inflation in the world's largest economy continues to slow, it's not falling as quickly as investors anticipated – ultimately rekindling Fed rate hike bets. Given how these latest inflation figures add to January's blowout jobs report, the dollar could edge higher in the short term," Otunuga added.
A number of Fed speakers also tilted hawkish this week, raising expectations for more rate increases.
Dallas Fed President Lorie Logan said the Fed must "remain prepared to continue rate increases for a longer period than previously anticipated" due to the "incredibly strong" labor market. Logan spoke at Prairie View A&M University.
Richmond Fed President Thomas Barkin told Bloomberg TV, "if inflation persists at levels well above our target, maybe we'll have to do more."
Meanwhile, Philadelphia Fed President Patrick Harker said policymakers might need to raise interest rates above 5%. How much above that level "is going to depend a lot on what we are seeing ... we had an inflation report that was good in that it is moving down, but not quickly."
This re-pricing of how many more rate hikes the Fed will have to resort to before pausing is costing gold its January gains, said Rupert Rowling, market analyst at Kinesis Money. "The prospect of interest rates rising diminishes the appeal of the precious metal, as it doesn't generate a yield for its holders, with other interest-bearing assets favoured instead," Rowling said Wednesday.
Strong economic data also minimize the odds of a hard landing, which was one of gold's primary drivers going into the new year.
"Many investors were anticipating that a hard landing scenario could prove troubling for risky assets and drive some flows towards bullion. Now it is looking less likely that a hard landing scenario will play out," said Edward Moya, senior market analyst at OANDA.
At the same time, weakness in gold reflects a lack of buyers, said TD Securities senior commodity strategist Daniel Ghali.
"China's behemoth buying activity, which underpinned the rally in gold over the last months, has ground to a halt. Turkey has halted imports of gold following the devastating earthquake," Ghali noted Wednesday.
The technical outlook is a bearish one for gold unless investors step in to buy the dip, according to analysts.
"Gold is under pressure on the daily charts. A solid daily close under $1,850 may open the door toward $1,815 and $1,800, respectively," Otunuga said.
In the short-term, gold can drop below $1,800 an ounce from a technical perspective, noted Australia and New Zealand Banking Group (ANZ). "A further selloff could confirm prices falling below USD1,800/oz," the bank said this week.
Year-to-date gold is up only 0.8% after rallying more than 6% in January. And after peaking at $1,960 an ounce at the end of January, April Comex gold futures last traded at $1,844.60 an ounce, down 1.12% on the day.
