(Kitco News) - While the precious metal appears to be carving out a bottom following last month’s sharp losses, analysts warn investors that gold’s critical support could be tested next week as the Federal Reserve’s tightening bias faces a key test from important inflation data.
The gold market continues to struggle to sustain bullish momentum, unable to hold convincingly above $4,100 as it prepares to end the week with another loss.
Gold prices struggled this past week as fighting in the Middle East once again intensified, extending the global energy crisis, supporting higher oil prices, and fueling inflation fears. Spot gold last traded at $4,097.86 an ounce, down nearly 2% from last week.
Analysts explained that this environment is difficult for gold because rising inflation pressures are forcing the Federal Reserve to maintain a hawkish monetary policy stance, and the potential for higher interest rates is increasing the opportunity cost of holding a non-yielding asset.
According to some analysts, U.S. monetary policy will be the biggest risk for the gold market as investors try to navigate the shifting narrative under new Federal Reserve Chair Kevin Warsh, who is pushing the central bank to limit and eventually eliminate forward-guidance policies.
Next week will feature Warsh’s first testimony before Congress as part of the Federal Reserve’s twice-yearly Semiannual Monetary Policy Report. Since becoming Federal Reserve Chair, Warsh has made it clear that his first priority is price stability, prompting markets to price in at least one rate hike this year, potentially as early as September.
However, analysts also note that his tone on inflation could begin to shift as oil prices remain below their May highs above $100 a barrel, easing inflation pressures. Ahead of Warsh’s testimony, markets will be paying close attention to June’s Consumer Price Index, which could provide fresh momentum for gold.
Philip Streible, Chief Market Strategist at Blue Line Futures, said that because of falling oil prices, markets are expecting to see a sharp drop in monthly headline inflation. He added that weak inflation data could confirm that gold has already established its lows.
Despite some downside risks, Streible said there is value in gold at current prices and now is the time to start building positions.
Economists at TD Securities are also expecting June’s inflation report to show benign consumer price increases, giving Warsh room to soften his hawkish stance.
“Soft goods prices and further shelter normalization should keep underlying inflation steady, though this year’s oil shock may continue to lift airfares. Risks to our forecast look more balanced than in recent reports. We expect headline CPI fell 0.22% m/m, led by a 10% drop in gasoline prices,” the analysts said in a note Friday.
In an interview with Kitco News, Robert Minter, Director of Investment Strategy at Aberdeen Standard Investments, said the market has become overly focused on Warsh's hawkish rhetoric while underestimating the structural forces supporting gold. He said that many of the institutional clients he speaks with do not expect the Federal Reserve to follow through with its hawkish bias.
“These clients who are institutional advisors are not buying this. They're not convinced that Warsh is a hawk. They're not convinced that he's about to hike rates,” Minter said. “Not even looking at inflation, the Federal Reserve is unlikely to do anything right before an election. That's an institutional preference regardless of who's in charge.”
He explained that he sees Warsh trying to establish his credibility rather than preparing for an aggressive tightening campaign. In this environment, he said the advisors he speaks with continue to see attractive value in the gold market despite the near-term volatility.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, remains firm in his view that the Federal Reserve will not raise interest rates this year, which should provide support for gold.
“Next week will clearly be a challenge, but I still hold onto the view that easing inflationary pressures in the coming months may start to change the rate hike narrative,” he said. “Warsh wants to assert his credentials while not upsetting Trump too much, while CPI will be at the higher end. I believe these outcomes are expected and close to being priced in.”
Although investors are starting to recognize value in the market, some analysts note that gold could continue to struggle because it lacks a meaningful catalyst.
Monte Safieddine, Head of Market Research at Capital.com, said he still sees gold trading within a bear market channel as real yields remain elevated.
“Momentum traders have been wary of entering at these levels due to the lack of an upside momentum move, and technical traders are noting the lower end of the channel, which is below $4,000,” he said. “Let's not forget that, like anything in the marketplace, the gold market needs buyers, reliant on consistent central bank demand but also for investors to experience renewed appetite, at a time when competition for liquidity is rising, enticing them away from non-yielding assets.”
David Morrison, Senior Market Analyst at Trade Nation, said that gold could continue to struggle as long as markets continue to price rate hikes for this year.
“As things stand, the CME’s FedWatch Tool suggests that there’s still an 80% probability of at least one 25-basis point rate hike before year-end, and a 60% (up from 50%) chance that the first increase could come in September. Unless this drops significantly over the summer, it’s likely that the US dollar will continue to find support, which, in the current environment, will weigh on gold,” he said in a note Friday.
While the CPI report and Warsh’s two days of testimony on Capitol Hill will be the main highlights next week, retail sales, regional manufacturing surveys, and housing market data are also expected to generate volatility across financial markets.
Markets will also be watching the Bank of Canada’s monetary policy meeting, as investors assess whether global central banks will continue to raise interest rates in response to persistent inflation pressures.
Economic data to watch next week:
Tuesday: US CPI, Kevin Warsh to testify before the House Financial Services Committee
Wednesday: US PPI, Empire State Manufacturing Survey, Bank of Canada monetary policy meeting, Warsh to testify before the Senate Banking Committee
Thursday: US Retail Sales, Philly Fed Manufacturing Survey, US weekly jobless claims; US Pending Home Sales
Friday: US Housing Starts and Building permits, University of Michigan Preliminary Consumer Sentiment Survey
