(Kitco News) - Gold investors could see higher volatility next week as the Federal Reserve is expected to signal it will not be ready to lower interest rates before the summer.
At the same time, analysts have said that with summer rate cuts off the table, it is unlikely the central bank will start its easing cycle before the 2024 U.S. elections in November. At first blush, the central bank's stance would be negative for gold as investors continue to take profits after failing to hold record highs above $2,400 an ounce.
Some investors have started to take profits as June gold futures are looking to end the week testing initial support around $2,350 an ounce, down more than 2% from last Friday. However, some analysts said that many investors are still holding on to solid gains, despite the sharp drop.
Analysts have also noted that the latest economic data puts the central bank in a difficult position as inflation remains stubbornly elevated and growth slows, providing some support for gold.
Phillip Streible, Head of Market Strategy at Blue Line Futures, said he remains bullish on gold as the U.S. economy appears to be entering a period of stagflation. However, he added that investors will have to pay close attention to next week's data, including April's government employment data.
Streible added that a disappointing nonfarm payrolls report that shows weak employment growth and elevated wages would paint an even clearer stagflation picture, which could push gold prices out of their current consolidation.
While U.S. economic data and interest rates will create some short-term volatility in the gold market, analysts note that this remains a secondary factor for the precious metal.
Despite seeing its worst one-day drop in roughly two years at the start of the week, gold's correction from its all-time highs has been relatively shallow. Analysts also note there are other factors supporting gold, like the U.S. government's growing debt and deficit.
"The recent behavior shows investors are increasingly concerned about inflation and a potential debt crisis as US Treasury yields continue to rise," said Ole Hansen, Head of Commodity Strategy at Saxo Bank.
Robert Minter, Director Of Investment Strategy at abrdn, said that he expects gold prices to remain well supported as institutions grow concerned about the U.S. government's burgeoning debt. He added that in this environment, central banks will continue to limit their exposure to the U.S. dollar and U.S. debt.
"At some point, the bond market vigilantes will be back because government spending is out of control," he said. "The interest expense on US government debt is more than the expenditure on U.S. defense. There is an alternative to holding U.S. Treasuries, and that is holding gold. Generalist investors don't see this yet, but they will at some point. $2,400 is definitely not the high-water mark for gold."
James Stanley, Senior Market Strategist at Forex.com, said that although the Federal Reserve is expected to maintain its restrictive monetary policies through the summer, its hawkish tones will be tempered.
"The fundamental backdrop is that the Fed doesn't want to raise interest rates; they will continue to leave the door open for rate cuts this year, which will support gold prices," he said.
However, Stanley said he is less interested in gold's fundamental outlook and more concerned with its near-term technical price action.
He added that next week will be an important test for gold if the price closes the month below $2,300 an ounce. He said this level has become an important pivot point.
"Gold is looking overbought on a monthly chart, and a close below $2,300 mid-week will create a fairly big shadow on the upside and could give some bulls trouble," he said.
Hansen has described the price action in gold so far as a healthy correction. He added that he sees the next major support level around $2,255 an ounce.
"Holding above this level will send a signal to the market that the retracement is nothing but a weak correction within a strong uptrend," he said.
Although the Federal Reserve and Friday's nonfarm payrolls report will be the two main economic events next week, there is a full docket of data due for release that will add to the volatility next week.
However, analysts said the central theme remains the tug-of-war between economic growth and inflation.
Economic data to watch next week:
Tuesday: US Consumer Confidence
Wednesday: ADP nonfarm employment, ISM manufacturing PMI, JOLTS job openings, Federal Reserve monetary policy decision
Thursday: Weekly jobless claims
Friday: Nonfarm payrolls, ISM Services PMI