Gold prices could continue to struggle as the focus remains on oil prices and inflation

Kitco Media
By Neils Christensen
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Gold prices could continue to struggle as the focus remains on oil prices and inflation teaser image

(Kitco News) - The gold market is ending another week on its back foot as the ongoing global energy crisis, driven by the war in Iran, pushes inflation fears higher and forces central banks to shift from an easing bias to a ‘wait-and-see’ approach to their monetary policies.

While central banks may not be ready to raise interest rates anytime soon, even as inflation pressures rise, the hawkish tilt has been enough to spook the gold market. Spot gold last traded at $4,618.70 an ounce, unchanged on the day but down nearly 2% from last Friday.

Lukman Otunuga, Senior Market Strategist at FXTM, said that gold could continue to struggle next week, as there is no sign that the conflict with Iran will end anytime soon. Although a ceasefire is in place, the Strait of Hormuz remains closed to shipping traffic.

“Despite extended periods of uncertainty and growing market fatigue, gold could be stuck at the losing end due to triple-digit oil prices,” he said.

Although next week will provide important insights into the U.S. labor market, analysts said that economic data will continue to take a back seat to the ongoing energy crisis and elevated oil prices.

“Until the Strait of Hormuz is open and oil starts flowing, everyone is going to be focused on inflation,” said Philip Streible. “Central banks can’t do anything until they know if inflation is going to be persistent or temporary, and that means gold will remain stuck.”

Michael Brown, Senior Market Analyst at Pepperstone, said that he doesn’t expect next week’s employment data to shift the Federal Reserve’s monetary policy.

This past week, the U.S. central bank decided to leave interest rates unchanged, as expected; however, Powell noted that there was a healthy debate among committee members about whether they should remove their current easing bias.

Powell added that the central bank is not expected to hike rates anytime soon; however, markets also don’t think a cut is likely this year.

Although gold could continue to struggle in the near term, Brown said that he continues to see lower prices as a buying opportunity.

“Focus is very much on the impact of higher energy prices as a result of developments in the Middle East right now. I do think, though, that there are still plenty of paths to a rate cut or two before year-end, either Warsh convincing his colleagues of an AI-driven productivity boom, further labour fragility if inflation does indeed prove temporary, and/or the need for a lower fed funds rate if Warsh succeeds in shrinking the balance sheet & shortening its duration,” he said. “This is a dip that I’d be buying, consequently, as numerous tailwinds remain amid the positive risk tone, and as EM CBs continue to increase their holdings too.”

Looking at gold prices, Otunuga said that $4,600 remains a key psychological level.

“Weakness below this point may open the doors toward $4,450 and $4,320,” he said. “A weekly close above $4,600 could trigger a move toward the 21-day SMA at $4,710 and the 100-day SMA at $4,750.”

Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that the next support level he is watching is $4,500 an ounce. At the same time, he said that the yellow metal needs to see prices back above $4,670 an ounce to regain some technical momentum.

“We need to have the ME crisis sorted before we can return to focusing on something as boring as economic data and stagflation risks,” he said. “Also, the stock market is currently on steroids, so that’s the sector investors are currently chasing. I’m cautiously optimistic and see greater upside than downside risks from here. However, Kevin Warsh has his work cut out for him if he indeed wants to argue for lower rates at this stage.”

Economic data to watch next week:

Tuesday: US ISM Services PMI, US JOLTS job openings, US New Home Sales 

Wednesday: ADP Employment

Thursday: US weekly jobless claims 

Friday: US Nonfarm Payrolls, University of Michigan Consumer Sentiment  

Kitco Media

Neils Christensen

Neils Christensen has a diploma in journalism from Lethbridge College and has more than a decade of reporting experience working for news organizations throughout Canada. His experiences include covering territorial and federal politics in Nunavut, Canada. He has worked exclusively within the financial sector since 2007, when he started with the Canadian Economic Press. Neils can be contacted at: 1 866 925 4826 ext. 1526 nchristensen at kitco.com @KitcoNewsNOW

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