(Kitco News) - While the gold market appears to be building a new base above $4,000 an ounce, analysts note that gold’s failed breakout above $4,200 an ounce could mean the market needs to consolidate a little longer to build enough momentum to test last month’s all-time highs.
Analysts note that gold remains in a long-term uptrend but is stuck in a neutral range, particularly as markets start to doubt the Federal Reserve will be able to cut interest rates next month.
Thursday marked the official end of the U.S. government’s 43-day shutdown, the longest in history. While economic data will begin to be updated next week, analysts and economists are not confident that the numbers will be reliable enough to gauge the health of the economy. Specifically, some data on inflation and the labor market will be lost due to the shutdown.
Because of this lack of quality data, economists are beginning to hedge their bets ahead of the Federal Reserve’s next monetary policy meeting. Some central bankers have said they are reluctant to cut interest rates next month because they don’t have a clear picture of where inflation and the labor market are heading.
Heading into the weekend, the CME FedWatch Tool shows that markets see less than a 50% chance of a December rate cut. One month ago, markets saw more than a 90% chance of additional easing.
Market analysts have said this uncertainty is weighing on gold, with prices set to end the week well off their weekly highs. Spot gold last traded at $4,095.80 an ounce, up 2.4% on the week; however, prices are down nearly 3.5% from Thursday’s highs.
"Gold’s momentum is being sharply tested, with prices down over 3% today and a broader sell off sweeping through metals, equities, and crypto markets as rate cut skepticism intensifies,” said Neil Welsh, Head of Metals at Britannia Global Markets. “This illustrates how dependent near-term sentiment has become on central bank policy signals. However, with gold still up significantly over the past year, the longer-term structural case remains intact, supported by persistent macro risks, central bank demand, and ongoing diversification even as short-term volatility persists."
Hill noted that while gold is holding near-term resistance above $4,000 an ounce, it is difficult to determine whether this momentum will hold given the uncertainty surrounding U.S. monetary policy.
“The hawkish Fed rhetoric suggesting a potential pause next month will likely hinder upside in the yellow metal for now. You will note that Gold is down nearly 3.0% today, and if we see the unit engulf US$4,000 – a widely watched number – and the US$3,886 low formed in late October, this could trigger breakout selling to US$3,748, I believe,” he said. “Consequently, while the trend clearly favours buyers in the longer term, we could be in for a little more pain, especially if we absorb US$3,886 bids.”
However, not everyone is as reserved, as gold has made significant gains from October’s sharp selloff. Christopher Vecchio, Head of Futures Strategies and Forex at Tastylive.com, said the lack of economic data will ultimately have little impact on long-term U.S. monetary policy.
He added that the Trump Administration has continuously downplayed rising inflation and growing economic risks.
“The White House is convinced that inflation is not a problem and that the economy is okay, so they are prepared to run the economy hot,” he said. “The clock is running down on Powell’s tenure, so one meeting is not going to change the Fed’s outlook. This is less about the journey and one meeting and more about the destination.”
Vecchio said he expects gold to see some short-term profit-taking at elevated levels; however, he is still looking to buy on dips.
Phillip Streible, Chief Market Strategist at Blue Line Futures, said he also continues to buy gold on dips. He added that as long as gold remains above $3,900, it is in a solid uptrend.
“Ultimately, investors have recognized that gold has become a strategic asset and should be owned,” he said.
Although the government shutdown has ended, it will take some time before economic data is released. However, regional and preliminary manufacturing data and U.S. housing market sales numbers will provide some insights into the health of the U.S. economy.
Economic data to watch next week:
Monday: Empire State Manufacturing Survey
Wednesday: Minutes of the Federal Open Market Committee meeting
Thursday: Philly Fed Manufacturing Survey, weekly jobless claims, US Existing Home Sales
Friday: S&P Flash PMI data, Revised University of Michigan Consumer Sentiment
