(Kitco News) - Caution is creeping into the gold market as investors prepare for the Federal Reserve to announce a hawkish rate cut following its last monetary policy meeting of the year.
Although gold remains in a holding pattern ahead of Wednesday's decision, one analyst said that the central bank’s messaging could spark a larger correction in the precious metals market. Spot gold prices last traded at $2,653.40 an ounce, up 0.22% on the day, as the market treaded water.
In his latest note on gold, Kelvin Wong, Senior Market Analyst at OANDA, observed that the yellow metal continues to struggle with resistance above $2,700 an ounce. He added that gold faces significant headwinds as bond yields rise and inflation fears persist.
“Market-transacted financial instruments have started to price in a further uptick in U.S. inflationary expectations, as derived from the movements of both the 5-year and 10-year U.S. breakeven inflation rates, which have been trending upwards since the start of the current Fed interest rate cut cycle,” he said in his note. “The primary catalyst for the current medium-term uptrend in the 5-year and 10-year U.S. breakeven inflation rates has been triggered by the proposed policies of Trumponomics 2.0. These policies include deeper corporate tax cuts and higher trade tariffs on U.S. imports, which are likely to revive inflationary pressures in 2025 and beyond.”
Wong also highlighted that real yields on 10-year notes have significantly rebounded after testing support last week at 1.90%. He said that a push towards 2.29% would increase the opportunity cost of holding gold, making it a less attractive asset for investors.
While medium-term risks are growing for gold, Wong noted that the precious metal remains in a well-established long-term uptrend.
“[Gold] is likely to be supported by the longer-term effects of the higher trade tariffs component of Trumponomics 2.0, which may lead to further deglobalization. This deglobalization could trigger headwinds to global economic growth, where gold (XAU/USD) may see higher demand due to its defensive hedging element,” he said.
Since its recent all-time high of $2,716, printed on October 31, the price action of gold (XAU/USD) has oscillated in a consolidation pattern, with a lingering risk of a multi-week corrective decline. This decline could retest its key 200-day moving average within the broader uptrend that has been in place since October 6, 2023.
Looking atgold’s technical outlook, Wong said that prices must hold medium-term support at $2,537 an ounce. A drop to this level could potentially kickstart new bullish momentum; however, if that level fails, the next support zone lies between $2,484 and $2,415 an ounce.
“On the other hand, a breakout above $2,716 would invalidate the corrective decline scenario and revive bullish momentum, targeting the next medium-term resistance zone of $2,850–$2,886 as the first step,” he said.
