(Kitco News) - With the U.S. government shutdown now in record territory, economists are finding it increasingly difficult to judge the health of the economy—and that uncertainty is creeping into the gold market. Analysts are now looking for direction from other sources, including equity markets and the U.S. dollar.
The gold market is set to end the week roughly where it started, with the $4,000 level emerging as a critical resistance point and psychological barrier. While most analysts agree that gold’s long-term fundamentals remain firmly in place, they note that another catalyst is needed to generate fresh momentum.
Although gold could tread water over the next few weeks, analysts have said that the precious metal has more upside potential than downside risk.
“It is likely to fluctuate sideways for the time being. Even though the waves in trade policy have calmed down somewhat, the conflicts are by no means resolved. Gold is therefore likely to remain in demand as a safe haven, even though the U.S. dollar has recently gained some ground again. In addition, we continue to expect stronger interest rate cuts in the U.S. than the market is currently pricing in. Should the fog surrounding the U.S. economy lift with the resumption of data publication, the market could swing in our direction, giving the gold price a boost,” said Barbara Lambrecht, commodity analyst at Commerzbank, in a note Friday.
Michael Brown, Senior Market Analyst at Pepperstone, also sees more upside potential for gold, even if prices continue to trade sideways. He added that the $4,000 level could prove to be a “tough nut to crack.”
“I still see this as gold carving out a relatively wide range between $3,900/oz and $4,400/oz, which seems like a plausible band in which we might trade for the time being,” he said. “Risks to that range, in my mind, continue to tilt to the upside—not only as haven demand and concerns over unanchored inflation expectations, which drove bullion higher in the first place, have hardly gone away, but also as demand from reserve allocators remains strong.”
The first trading week of the month is traditionally busy with key employment data; however, because of the government shutdown, now in its 38th day, economists are having to rely on private-sector data, which has been mixed.
On Wednesday, private payroll processor ADP reported that the U.S. economy created 42,000 jobs in October, beating expectations. However, on Thursday, a report by Challenger, Gray & Christmas said that U.S. employers cut more than 150,000 jobs in October—the biggest monthly reduction in more than 20 years.
Meanwhile, the Institute for Supply Management said its service-sector Purchasing Managers Index showed a slight increase in its Employment Index; however, the labor market remains in contraction territory.
Despite the mixed signals, economists note that the labor market continues to show signs of slowing, which in turn will likely prompt the Federal Reserve to cut interest rates next month, providing some support for gold through year-end.
“Gold’s consolidation around the $4,000 mark reflects an ongoing tug-of-war between resilient fundamental drivers—notably robust central bank purchases and safe-haven demand—and technical pressure from profit-taking and a strong U.S. dollar,” said Neil Welsh, Head of Metals at Britannia Global Markets. “The upcoming Federal Reserve meeting is a key focus, adding a layer of uncertainty as traders weigh further rate cuts that could either break gold out of this range or keep a lid on the prospect of a renewed rally.”
According to the CME FedWatch Tool, markets currently see a 66% chance of a rate cut next month. Expectations dropped sharply after last week’s Federal Open Market Committee meeting, when Federal Reserve Chair Jerome Powell cautioned that a December rate cut was not a foregone conclusion.
Beyond U.S. monetary policy, analysts are also monitoring U.S. equity markets as a potential catalyst for gold. Many note that gold has served as an attractive portfolio diversifier as U.S. equity markets have rallied to record highs.
“We could see gold make a comeback as U.S. equity markets start to lose ground,” said Phillip Streible, Chief Market Strategist at Blue Line Futures. “Gold remains an attractive asset as risks of stagflation begin to rise again.”
Another potential catalyst for gold could be renewed weakness in the U.S. dollar. Despite a seven-week uptrend, the U.S. dollar index was unable to hold gains above 100 points and looks set to close the week at 99.5.
With the U.S. government expected to remain closed next week, markets will not receive any inflation data or retail sales figures.
