(Kitco News) – After last week’s explosive gains, the yellow metal posted another strong performance, but the story this week was the absence of any correction in gold prices despite sticky inflation as the market grew ever more certain that interest rates would fall regardless.
Spot gold kicked off the week trading at $3,590.69 per ounce, but the yellow metal spent little time below the $3,600 level. By 3:00 a.m. EDT, gold was already trading at $3,604 per ounce, and by Monday’s North American market open, the gold price had risen to $3,631.70.
The strong price action was seen throughout all sessions and regions this week, with the Asian open on Tuesday propelling gold from $3,637 at 8:00 p.m. Eastern to $3,653 per ounce by 10:15 p.m. After multiple attempts to break out of the mid $3,650s, North American traders managed to drive the price to the weekly high just shy of $3,675 per ounce 15 minutes after the open.
Gold prices then saw their first sharp pullback of the week, falling back to $3,635 by 11:00 a.m. and declining to $3,621 per ounce by 9:15 p.m. Tuesday evening.
This ultimately established the range for gold prices for the duration of the week, as rate-cut-supportive data drove the yellow metal back into the mid-$3650s, and flagging sentiment would see gold dip down into the $3,620 area once again.
Spot gold was once again testing this level of support when the August CPI report was released at 8:30 a.m. on Thursday, sending gold prices $20 higher in minutes and establishing near-term support above $3,630 per ounce thereafter.
The Asian session saw gold's last attempt to break out of the mid-3650s, but spot gold once again stalled just above $3,656 per ounce, whereupon traders were content to see the yellow metal oscillate between $3,640 and $3,652 heading into the weekend.
The latest Kitco News Weekly Gold Survey showed Wall Street sentiment remaining overwhelmingly bullish ahead of the expected Fed rate cut, while Main Street investors reined in their bullish sentiment after gold’s recent gains.
“Up,” said Darin Newsom, senior market analyst at Barchart.com. “The global situation hasn’t changed, with Chaos still the preferred policy.”
“Most likely higher,” said Rich Checkan, president and COO of Asset Strategies International. “Assuming the majority of market participants are correct about the Federal Reserve cutting interest rates next week, I would expect gold to benefit from the news. Higher prices would be in order. However, if the FOMC surprises the market by leaving interest rates alone, we could very well see a sell-off on the news due to profit-taking.”
“Up,” said Adrian Day, president of Adrian Day Asset Management. “New buyers coming into gold.”
Michael Brown, senior research strategist at Pepperstone, is bearish on gold prices for the week ahead. Brown thinks the gold market is expecting too much dovish sentiment from the Fed next week.
“Up,” said James Stanley, senior market strategist at Forex.com. “No point in reversing now, and there’s still no evidence that the run is over. I do have spot gold at a big level of $3,654, but sellers haven’t yet shown that they’re able to take over, and with the Fed next week, I want to stick with the dominant trend until there’s evidence to suggest otherwise.”
Daniel Pavilonis, senior commodities broker at RJO Futures, was reviewing the week’s economic data ahead of the Fed meeting next week. He said everything he sees points to more gains for gold.
“I think consumer confidence, Michigan consumer sentiment, and all of the economic data is telling a story where inflation is spotty,” he said. “And then the labor aspect to everything is showing that the labor market is just weakening. With the Fed’s dual mandate, they have to be supportive of the labor market.”
“The MO since Bernanke is basically to talk the market through what the expectations are,” Pavilonis said. “The Fed essentially is forced to cut rates. I don't think they can back away at this point. The revisions to the labor data have just been so bad. I don't think we're going to see a 50-basis-point cut or anything like that, but it's probably going to be consecutive cuts, three cuts into the end of the year.”
He said that gold prices are reflecting a broad consensus on where the overall market is going.
“I think the gold market looks at this as this still-sticky inflationary environment, where now we're cutting rates to support the labor market, which can have this bullwhip effect of flushing in new inflationary waves in the future,” he said. “I think that central banks, to just the guy on the street, are looking to buy gold as the ultimate hedge on inflation.”
The other side of the equation, Pavilonis said, is the debt spiral.
“Historically, the only way for government to get out of this much debt is to inflate their way out of debt,” he said. “This is just the way things have worked economically for decades now. I think that's the other aspect of what's going on; Central banks realize that their holdings have to go up as a hedge, and the guy in the street is looking to hedge too. I think that's what we're seeing now.”
Pavilonis also pointed out that all the different financial products available to buy gold through now are also supporting this rally.
“You could do it through ETFs, you could do options on ETFs, you could do zero-day ETF options, force market makers to look at gamma squeeze, the whole nine yards,” he said. “And because if you have a certain amount of physical supply, the magnification of all those trading products on top of that supply would push the price higher too, so it's like this perfect storm.”
“I'm bullish commodities across the board. I think that this is a play out of the 1970s when gold was one of the most valuable commodities, obviously for inflationary reasons, as a store of wealth.”
“I think gold hits $4,000 by the end of the year.”
This week, 15 analysts participated in the Kitco News Gold Survey, with Wall Street bulls maintaining their control as gold prices maintained their gains. 12 experts, or 80%, expect to see gold prices rise during the week ahead, while only two, or 13%, predicted a price decline. The remaining analyst, representing 7% of the total, saw the yellow metal trading sideways next week.
Meanwhile, 268 votes were cast in Kitco’s online poll, with Main Street investors dialing back their bullish bets ahead of the Fed. 174 retail traders, or 65%, looked for gold prices to rise next week, while another 46, or 17%, predicted the yellow metal would lose ground. The remaining 48 investors, representing 18% of the total, expected prices to consolidate during the week ahead.
Next week is a big one for economic news with several major central bank rate decisions – including the U.S. Federal Reserve – but there will also be plenty of other market-moving releases.
Monday will see the release of the Empire State Manufacturing Survey, followed by the U.S. Retail Sales report for August on Tuesday morning.
Then on Wednesday, markets will receive August Housing Starts and Building Permits data, followed by the Bank of Canada’s monetary policy decision, before all eyes turn to Washington for the Federal Reserve’s rate announcement and Fed chair Powell’s press conference in the afternoon.
Thursday morning brings the Bank of England’s monetary policy decision, followed by U.S. weekly jobless claims and the Philly Fed Manufacturing Survey. The economic news week wraps up with the Bank of Japan’s monetary policy decision late Thursday evening.
“Gold set a record high this past week and rose for the sixth week in the past seven,” said Marc Chandler, managing director at Bannockburn Global Forex. “Sentiment is nearly universally bullish gold. The PBOC continues to buy gold and is set to liberalize gold import/export rules. As one would expect, the momentum indicators are stretched, but central banks, and Poland, appear to have bought more gold than China this year, are not particularly price sensitive.”
“Support may be more meaningful than resistance,” Chandler added. “Initial support is seen near $3600. A rally in US rates and a bounce in the dollar could see the yellow metal pull back. Still, buying on dips still seems evident.”
Adam Button, head of currency strategy at Forexlive.com, said gold executed a beautiful textbook breakout last week, and the yellow metal got plenty of support from around the world this week. “Why wouldn't it keep going higher?”
“The start of the week, we had the French Prime Minister turfed and the Japanese Prime Minister resign,” he said. “I think hopes for peace in Russia have taken a hit. It looks like America's trying to do G7 sanctions, that's not going to go anywhere. Peace can happen quickly, always, but it's clear right now that Trump's initial efforts have failed, and so they're going to try something else.”
“People are looking for safe havens, and there are no safe haven currencies anymore,” Button said. “Japanese yields are ticking up. Europe is highly uncertain. Switzerland, I guess, but not really, you’ve got negative rates there, or the threat of negative rates. The U.S. is unstable. In terms of the Fed, if I look at it over the last couple of months, you fired the [BLS] stats chief, trying to fire Cook, probably fired Kugler.”
“It really does come back to the U.S. and the erosion of what America has stood for the last 30 years: Open borders, open trade, and democracy,” he added. “All roads lead to gold, and the chart tells you that. What isn't working for gold right now?”
Button said that gold does look a little bit overbought, and he expects traders will probably hunker down until the FOMC meeting next week.
As for the Fed rate decision itself, he doesn’t think markets will need a 50-basis-point cut to keep the party going as long as Powell tilts the emphasis towards employment as the bigger concern.
“I think the worst-case scenario for gold would be if Powell really pushes back strongly, and says they want to finish the job on inflation,” Button said. “I really just don't see a huge risk from the Fed. You probably do have some sell-the-news risk on the statement and on [the] Powell [press conference] because he's not going to tee up a cut. They'll cut 25 and say, ‘We're data dependent.’ And then you'd have to push back really hard against the market.”
“Why would you do that? You have another month before you need to tip your hand," he said. "So you do 25 and buy yourself six weeks, and if you have to do it again in October, that's a pretty easy call too.”
In terms of price levels, Button doesn’t think gold will break through $3,675 ahead of the rate decision, but he sees significant gains through year-end.
“We'll consolidate below that until then, and then we’ll go where the Fed takes us,” he said. “Once you get beyond that, you're just thinking about big round numbers, so $3,750 and then $4,000.”
“I think we're headed to $4,000 right around the turn of the year, January is around where I targeted,” Button said. “You've got that seasonal tailwind then. But this is traditionally the worst month for gold, and it's held up so far. How deep of a dip do you want to buy on the Fed if it goes sideways? $3,500, I think that's where you start buying pretty aggressively.”
Alex Kuptsikevich, senior market analyst at FxPro, expects gold prices to pull back next week.
“Gold reacts strongly to geopolitics and has reached another record high, rising for the fourth week in a row,” he noted. “Washington is ready to wage economic war on the Kremlin's main allies, India and China, if Brussels supports it. As a result, there is an increased risk that central banks will step up their gold purchases as part of their reserve diversification and de-dollarisation processes.”
“However, in the short term, we note technical overbought conditions after an impressive rise,” Kuptsikevich warned. “This was reflected in the stabilisation of prices from Tuesday to Thursday, contrary to the continued growth of silver and other precious metals and new highs in stock indices. In daily timeframes, the RSI gradually declines after touching the zone above 80. In 10 out of 11 cases over the past six years, such a signal has been followed by corrective pullbacks, which may well happen again this time.”
“The expected cut in the key rate on Wednesday risks triggering a ‘buy the rumours, sell the fact’ pattern,” he added.
Analysts at CPM group issued a buy recommendation for gold on Thursday, with an initial target price of $3,710 by September 19 and a stop loss at $3,650.
“Gold prices reached a record $3,715.20 on 9 September before retreating,” they said. “There was an expectation that gold prices could move higher as inflation data for the U.S. was expected to rise, but the increase matched market expectations, dulling price moves.”
The analysts noted that prices appear to be holding above $3,650 per ounce. “In CPM’s view, it is more likely that prices continue to move higher despite gold already near record levels,” they wrote. “The concerns about financial, economic, and political conditions continue to keep investors interested in gold.”
They noted, however, that profit-taking has the potential to weigh heavily on gold prices. “A break below support levels could push prices perhaps $50 to $100 lower,” they warned. “This said, it is difficult to see this scenario at least heading into the weekend, where market participants seem to not want to be caught short given the political events that can occur when markets are closed.”
And Kitco senior analyst Jim Wyckoff believes gold longs are still in the driver’s seat.
“Technically, December gold futures bulls have the strong overall near-term technical advantage,” he wrote. “Bulls’ next upside price objective is to produce a close above solid resistance at $3,750.00. Bears' next near-term downside price objective is pushing futures prices below solid technical support at $3,550.00. First resistance is seen at $3,700.00 and then at this week’s contract high of $3,715.20. First support is seen at the overnight low of $3,667.30 and then at $3,650.00.”
At the time of writing, spot gold last traded at $3,646.42 per ounce for a gain of 0.34% on the day and 2.85% on the week.
