(Kitco News) - Although gold prices remain stuck below $4,100 an ounce, analysts are starting to see a shift in sentiment in the marketplace, and support at $4,000 is increasingly being recognized as an attractive value point, even as the Federal Reserve maintains a tightening bias.
Although inflation remains well above the Federal Reserve’s 2% target, some analysts have said that gold is becoming more sensitive to disappointing economic data after the U.S. government reported weaker-than-expected economic activity during the second quarter.
Analysts have pointed out that gold remains precariously balanced ahead of a busy week of employment data.
“Gold is very much stuck in a range and even a small surprise is likely to push the price out of its range,” said Naeem Aslam, Chief Investment Officer at Zaye Capital Markets. “Next week will be highly important for gold traders as the bar can shift on either side. Overall, we do believe that markets have become sensitive in the light of the US GDP numbers, but we have to factor in everything, including the Fed meeting, which indicated that some members want to increase the rates.”
According to consensus forecasts, economists expect the economy to have created 91,000 jobs.
In a recent interview with Kitco News, Aakash Doshi, Head of Gold Strategy at State Street Investment Management, said another month of disappointing employment data could prompt markets to reprice current rate hike expectations.
“If there is a shift in rate expectations, which pushes 2-year yields below 4%, gold prices could get to $4,500 to $4,750 an ounce before the end of the year,” he said.
While better-than-expected employment data could put further pressure on gold, eventually pushing prices below $4,000 an ounce, some analysts have said the downside is still limited and any further correction continues to represent a buying opportunity.
Robert Minter, Director of Investment Strategy at abrdn, said investors are becoming less focused on the Federal Reserve's hawkish rhetoric and more focused on the long-term fundamentals supporting gold, including rising government debt, resilient central bank demand, and a growing recognition that higher interest rates have practical limits.
“At the end of the day, you can’t have dramatically higher rates,” he said.
Minter explained that the Federal Reserve’s latest monetary policy decision is a good indication of shifting sentiment in the marketplace.
Although the Federal Reserve left interest rates unchanged on Wednesday, the central bank maintained a solid tightening bias, as three committee members voted to raise the federal funds rate by 25 basis points.
"After those announcements, the value of the dollar fell," he said. "That's validation that gold investors are on the right track."
Jeff Sarti, CEO of Morton Wealth, said that gold’s ability to hold the line at $4,000 an ounce, even as the Federal Reserve looks poised to raise interest rates, could be a sign that investors are looking through the central bank’s hawkish rhetoric.
“Even with inflation staying at levels that give the Fed angst, the recent Fed meeting, where they kept rates steady, is a clear sign that they are not eager to raise rates,” he said. “And if they do raise rates, it won’t be by much.”
Sarti added that in the current environment, he doesn’t expect real rates to move high enough to put additional selling pressure on gold.
“Interest rates, especially real interest rates, aren’t close to high enough to counter the rationale for owning gold. And of late, we’ve seen a bit of a turn where rates have gone higher on the long end and gold has actually held up nicely,” he said. “So perhaps the narrative is starting to change. High 4% rates on the long bond are not interesting, and I would rather own gold all day long until rates move meaningfully higher.”
However, not all analysts are optimistic that gold can reestablish its broader long-term uptrend. Carsten Fritsch, Commodity Analyst at Commerzbank, said that although the Federal Reserve remains on hold, markets are still pricing in a rate hike in September.
“The persistent expectation of Fed interest rate rises should counteract any rise in the gold price. These expectations are unlikely to fade for the time being, as inflation is not yet showing sufficient signs of easing,” he said.
Although Friday’s nonfarm payrolls report will be the main economic event next week, there will be plenty of additional labor market data to create a volatile trading environment. At the same time, markets will also be paying close attention to manufacturing data.
Weekly economic data to watch:
Monday: ISM Manufacturing PMI
Tuesday: US JOLTS Job report
Wednesday: US ADP employment data, ISM Services PMI
Thursday: US weekly jobless claims
Friday: US Nonfarm Payrolls
