(Kitco News) - The gold market has managed to reclaim the $5,000-an-ounce level ahead of the weekend, but analysts are cautioning investors that Thursday’s sharp selloff is an indication that the market is still trying to find its balance.
Both gold and silver saw a relatively quiet start to the week, with prices hovering around key psychological levels at $5,000 and $80, respectively. However, both metals were hit with significant selling pressure on Thursday, as gold prices fell 3% and silver dropped more than 10%.
“That was a very peculiar move that we saw yesterday, not only in gold but in silver as well, given that it came with no especially obvious catalyst behind it,” said Michael Brown, Senior Market Analyst at Pepperstone. “As we work to slowly erase most of the losses through today’s session, given what we saw yesterday, I think it’s hard to say with any confidence that the worst of the volatility is behind us. I remain of the view that we do need to see a period of consolidation before embarking on the next leg of a run higher.”
Despite the volatility, the gold market has managed to reclaim some of its lost ground following cooler-than-expected inflation data on Friday morning.
The U.S. Bureau of Labor Statistics said that annual CPI inflation rose 2.4% in January, down sharply from the 2.7% increase reported in December. According to consensus forecasts, economists had expected a 2.5% increase over the past 12 months.
Spot gold last traded at $5,021.80 an ounce, up 2% on the day and up 1% from last Friday. Meanwhile, silver has struggled somewhat, as it remains below $80 an ounce. Spot silver last traded at $77.46 an ounce, up 3% on the day and relatively unchanged on the week.
Analysts have said that gold has managed to catch a bid as the inflation data provides the Federal Reserve with an excuse to lower rates. However, according to the CME FedWatch Tool, the central bank is not expected to make any move until June.
“Gold prices are creeping higher after the US inflation data supported expectations around lower US rates. Today’s inflation data seems to have stimulated bets around lower rates, with traders now pricing a 50% chance of a third cut by December 2026,” said Lukman Otunuga, Senior Market Analyst at FXTM. “ However, it may be too early for bulls to celebrate, with $5000 acting as a significant psychological resistance. A breakout above this key level may open a path toward $5050 and $5100. Weakness under $5000 could see prices descend back toward $4900. Yesterday’s sudden selloff still highlights the shaky sentiment towards gold as it nurses deep wounds inflicted by the ferocious selloff in late January.”
Along with swirling expectations around U.S. monetary policy, some analysts have said that gold prices could be sensitive to growing selling pressure in equity markets, as the S&P 500 has been unable to break resistance at 7,000 points. Equity markets have been sensitive to growing concerns that the ongoing AI tech boom supporting the broader market might prove unsustainable.
Although gold is traditionally a safe-haven hedge against financial market weakness, it is also a highly liquid asset that investors tap to maintain margin requirements.
In addition to volatility risks, some analysts note that gold and silver could face selling pressure as a key market closes next week. Chinese markets will be closed next week for Lunar New Year celebrations.
Analysts note that Chinese demand has provided significant support to the gold market, even during the recent violent price swings.
Barbara Lambrecht, Commodity Analyst at Commerzbank, said in a note Friday that she expects to see gold quietly consolidate next week during China’s New Year celebrations.
In North America, Canadian and U.S. markets are closed on Monday for Family Day and Presidents' Day, respectively. However, some key economic data could create price swings in gold and silver next week.
Markets will be anxious to see U.S. manufacturing data as well as housing market data.
Christopher Lewis, Senior Market Analyst at FXEmpire.com, said that while gold remains well supported by bullish fundamentals, it is a market that doesn’t know where to go next.
“You don’t need to overcomplicate it, and short-term pullbacks continue to be bought into. We just don’t have any follow-through,” he said. “Maybe we spend some time going sideways. I think that makes a certain amount of sense because quite frankly, we got here too quickly. And in this environment, I certainly wouldn’t want to get short of the market. But I do think that if we get a couple of hundred-dollar pullback, that should offer enough value to attract even more traders. Eventually, it would not surprise me at all to test the highs yet again.”
Economic data to watch next week:
Monday: US markets closed for Presidents Day, Canada’s TSX closed for Family Day
Tuesday: Empire State Manufacturing Survey, Reserve Bank of New Zealand monetary policy decision
Wednesday: US Durable Goods Orders, US Housing Starts and Building Permits, Minutes from the Federal Reserve’s January monetary policy meeting
Thursday: US weekly jobless claims; Philadelphia Federal Reserve Manufacturing Survey, US Pending Home Sales
Friday: US Advance Q4 GDP, Core PCE Index, S&P Flash Manufacturing PMI, Revised University of Michigan Consumer Sentiment, US New Home Sales
