(Kitco News) - After testing resistance at $2,700 at the start of the week, gold is once again on the back foot as stubborn inflation takes its toll on expectations surrounding the Federal Reserve’s easing cycle.
The precious metal received a much-needed boost earlier this week as investors reacted to news that China’s central bank resumed buying gold. After a six-month break, data from the People’s Bank of China showed it purchased five tonnes of gold in November. According to many analysts, the data underscores China’s significant role in the gold market and highlights healthy central bank demand heading into 2025.
However, the precious metal continues to face near-term volatility as attention now shifts to the Federal Reserve’s monetary policy meeting next week. According to the CME FedWatch Tool, markets have fully priced in a 25-basis-point rate cut following the Fed’s final meeting of 2024.
Spot gold futures last traded at $2,656.90 an ounce, up 0.88% for the week.
There is growing uncertainty regarding the duration of the current easing cycle in the new year. The gold market began selling off this week after the U.S. Labor Department reported that its headline Producer Price Index (PPI) rose 0.4% in November, following October’s unrevised 0.3% reading. Over the last 12 months, headline wholesale inflation increased by 3.0%, well above the consensus of 2.5% and October’s upwardly revised 2.6% reading.
The rise in wholesale inflation suggests that the threat to consumer prices remains elevated, which some economists say will discourage the U.S. central bank from raising interest rates.
In its outlook earlier this week, analysts at Wells Fargo said they expect only one rate cut next year. Similarly, Bank of America recently forecasted just two rate cuts in 2025.
Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said gold investors should prepare for potential weakness next week as the Federal Reserve pares back rate cut expectations.
“We are going to see a highly hawkish cut given the recent inflation reading, which means gold prices are likely to experience further downward pressure in the coming week,” he said. However, trading volume will likely decrease as many traders break off for the holiday period.”
Lukman Otunuga, Manager of Market Analysis at FXTM, is more neutral on gold, noting that the precious metal is caught in a tug-of-war. He added that while a hawkish Fed is negative for gold, the yellow metal still retains plenty of bullish momentum.
“The precious metal remains pressured by rising Treasury yields ahead of the Fed’s final policy meeting of 2024 next week. Nevertheless, the trend is firmly bullish on the weekly charts, with prices up almost 30% year-to-date,” he said. “Although the Fed is widely expected to cut interest rates by 25 basis points, the focus will be on messaging and future policy signals. A ‘hawkish’ Fed cut may limit gold’s upside potential as investors scale back expectations for deeper cuts in 2025. However, if the Fed leaves the door open for further easing next year, gold prices may rally back toward $2,700 or higher.”
Carley Garner, co-founder of the brokerage firm DeCarley Trading, said that while she remains neutral on gold through the rest of 2024, the market’s inability to sustain consistent gains above $2,700 an ounce signals weakness.
“We are in the process of putting in a major top in gold,” she said. “At this point, I would look for opportunities to sell rallies.”
Michele Schneider, Chief Strategist at Marketgauge, said she sees gold in a holding pattern between $2,600 and $2,800 an ounce. However, she added that the market is “waiting, as it often does.”
In the long term, she noted that global interest rates are continuing to ease outside the Fed’s monetary policy. At the same time, global debt continues to rise, which she said are two bullish factors for gold.
While there will be significant focus on Wednesday’s monetary policy decision, the market will also receive important economic data that could impact the easing cycle.
Economists point out that November’s retail sales numbers will provide key insight into the health of the American consumer at the start of the holiday season.
Additionally, the market will review important manufacturing data and the final reading for third-quarter GDP.
Economic data to watch next week:
Monday: Empire State Manufacturing Survey, S&P flash PMI,
Tuesday: US Retail Sales
Wednesday: Federal Reserve monetary policy decision
Thursday: Bank of England monetary policy decision; US weekly jobless claims; Final
US Q3 GDP, Philly Fed manufacturing survey, existing home sales
Friday: Personal Consumption Expenditures (PCE) Index
