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(Kitco News) - The gold market is struggling to find solid ground even as the Federal Reserve moves closer to the end of its tightening cycle, with the banking sector now doing most of the heavy lifting in reducing market liquidity.
Monday afternoon, the Federal Reserve published its latest Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), which showed tightening credit markets across the board.
In a note to clients, Paul Ashworth, chief North American economist at Capital Economics, noted that the survey data shows that credit conditions remain unusually tight even as fears from May's banking crisis continue to fade.
"Despite the optimism surrounding the real economy's performance over the first half of this year, credit conditions have historically only ever been this tight during, or in the run-up to, recessions," he said in the note.
Daniel Silver, an economist at JPMorgan, described the tightening credit market conditions as "pretty significant by broad historic standards;" however, he added that it doesn't guarantee that the U.S. economy will fall into a recession.
"[The data] are not a guarantee of a recession to come, but the tightening evident as of late suggests that the economy should slow," he said in a note.
According to some economists, the latest SLOOS report gives the Federal Reserve further breathing room to end its tightening cycle. Others have dismissed the survey saying that it provides little insight into the Federal Reserve's next monetary policy decision.
"It shows that the Federal Reserve is not as behind the curve as they once were, but that doesn't mean the tightening cycle is over," said Colin Cieszynski, chief market strategist at SIA Wealth Management. "I think we could see the Federal Reserve maintain a holding pattern with little tweaks to interest rates here and there."
Ciezynski said that gold traders need to keep an eye on upcoming inflation data as that will determine the U.S. central bank's next move. He added that for Friday's nonfarm payrolls report, he is paying more attention to wage inflation than the headline numbers.
Naeem Aslam, chief investment officer at Zaye Capital Markets, said that he doesn't think the latest SLOOS report from the Federal Reserve changes anything.
"For us, the Fed is already on the sideline now and they are done with their hawkish monetary policy and reports like loan reports are just another evidence that the Fed should not intervene anymore from a hawkish monetary policy perspective," he said.
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However, Aslam added that he is disappointed in gold's performance as evidence mounts that the Fed's tightening cycle is done.
"Speaking from the price point, we are a little concerned about the current weakness, which is mainly due to hefty interest in the riskier assets among traders. We think this is going to keep the lid on the price for now," said Aslam.
Nicholas Frappell, global head of institutional markets at ABC Refinery, said he also expects the latest survey data to have little impact on the Federal Reserve's path.
"The Fed is still focussing more on labor market conditions and inflation data and leaving the door open for a September hike," he said. "I believe gold will benefit once uncertainty over the Fed cycle diminishes, especially if tightening threatens slower growth."
While Frappell remains bullish on gold long-term, he said investors should brace for more volatility through the summer.
"I am fairly optimistic about gold overall because the medium to long-term trend remains bullish," he said, "but one side-effect of the Fed's data-driven behaviour is to introduce more volatility into expectations about the end of the cycle and too much willingness to see it come to an end."
