(Kitco News) - The gold market continues to consolidate in a narrow range as investors swing back and forth on the timing of the Federal Reserve's interest rate cuts this year.
Heading into the weekend, markets now see a roughly 50/50 chance of a rate cut in March. Expectations have dropped significantly compared to last week as markets saw an 80% cut next month.
The hawkish shift in U.S. monetary policy caused gold prices to fall to a five-week low just above $2,000 an ounce. Although gold has bounced off its recent lows, the precious metal is preparing to end the week with a loss. February gold futures last traded at $2,030.10 an ounce, down 1% from last Friday.
Analysts aren’t expecting gold prices to break out of this consolidation any time soon as economic data provides little guidance on U.S. monetary policy.
"It seems that traders are comfortable in holding riskier assets, which means that the path of the least resistance for gold is more of consolidation than anything else," said Naeem Aslam, chief investment strategist at Zaye Capital Markets.
James Stanley, senior market strategist at Forex.com, said that he expects higher volatility in the gold market as prices consolidate and test support around $2,000 an ounce.
However, he noted that any major dips in gold have been solid buying opportunities.
"I think that short play is going to continue to be painful," he said. "[The market was] close to $2,000 this week and then throttled higher, even with rates still running. If/when prices break down, the sell-off could be sizable, but those bear traps have made sellers pretty cautious."
Some analysts have noted that gold investors will need to keep a close eye on the U.S. dollar as the greenback continues to impact the precious metal's price action.
Next week could see some volatility for the U.S. dollar with three major central banks' monetary policy decisions on the docket.
The Bank of Japan will be first at-bat and is expected to maintain its dovish stance and negative interest rates. The Bank of Canada is the next in line, and with the surprise surge in inflation in December, the central bank has a more difficult path to follow.
Thursday, the European Central Bank caps off the week and provides the most risk for the U.S. dollar and gold.
This past week, members of the ECB have pushed back on early rate cuts at the World Economic Forum in Davos, Switzerland. Some analysts have noted that a hawkish ECB could weigh on the U.S. dollar and support gold prices in the near term.
Another risk for the U.S. dollar will come from domestic data, with investors paying close attention to inflation data released on Friday.
Fixed income analyst at TD Securities said that a drop in the core Personal Consumption Expenditures Index, the Federal Reserve's preferred inflation gauge, could support the central bank's easing plans.
"Despite a strong Dec core CPI, we project a milder expansion for core PCE inflation at 0.2% m/m. Dec data will likely show that the 3m/6m momentum has dropped below the 2% target," the fixed income analysts said.
At the same time, economic data is having only a limited impact on gold as prices continue to hold critical support levels.
Some market analysts note that solid physical demand in Asian markets continues to support the precious metals market.
Due to sustained gold demand from outside the West, gold has closed above $2K an ounce every day for the past 5 weeks, even with continued West outflows (19 tons GLD ETF outflows YTD & futures selling). Mining stocks driven by West, which has no interest in metals, only Magnif. 7 https://t.co/eFPAMTwTMb
— fred hickey (@htsfhickey) January 18, 2024
Commodity analysts at TD Securities said that they expected solid demand out of China companies preparing for the Lunar New Year celebrations will continue to support gold prices.
"This also appears to be supplemented by domestic speculative buying, with our tracking of positioning for the top ten participants in Shanghai still suggesting record buying activity that more than accounts for the rise in our proxy for wholesale demand. This set-up argues for notable upside in gold on the horizon," the analysts said.
Economic data to be released
Monday: Bank of Japan monetary policy decision
Wednesday: Flash PMI data, Bank of Canada monetary policy decision
Thursday: European Central Bank monetary policy decision, advance Q4 U.S. GDP, Durable goods sales, new home sales
Friday: Core PCE, personal income and spending
