(Kitco News) – Gold prices saw another volatile week of trading, with early attempts to stabilize above $4,400 per ounce eventually overwhelmed by surging oil prices, higher Treasury yields, and rising expectations that the Federal Reserve will raise interest rates at next week’s policy meeting.
Spot gold kicked off the week trading at $4,422.50 per ounce on Sunday evening, and the yellow metal initially tried to build on the prior week’s late recovery as traders monitored the U.S.-Iran conflict, the Strait of Hormuz, and renewed inflation risks from higher energy prices. The metal pushed higher into Tuesday, when spot prices set their weekly high at $4,442.98 per ounce, but the rally quickly faded as the dollar firmed and rate-hike expectations continued to build.
Selling pressure accelerated Wednesday and Thursday after PPI showed U.S. producer prices rose in August, reinforcing concerns that energy costs and supply disruptions were feeding back into inflation. Gold broke below $4,350 as Treasury yields climbed and traders priced in a growing chance that the Fed would tighten policy again at its Sept. 15-16 meeting.
The metal then rebounded Friday after August CPI kept inflation pressure alive but did not trigger a fresh panic, helping dip-buyers step in near the lower end of the week’s range. Still, the recovery remained capped as core inflation kept the Fed-hike trade firmly in play, with futures markets pricing the odds of a September rate increase sharply higher after the data.
After falling to its weekly low at $4,292.11 per ounce on Friday, spot gold recovered part of the previous days’ losses but failed to reclaim the $4,400 level, leaving the metal lower on the weekly chart heading into the weekend.
The latest Kitco News Weekly Gold Survey showed Wall Street returning to its bullish bias after gold’s late-week rebound, while Main Street further pared back its bullish majority following another weekly decline.
“Gold may trade higher into the FOMC meeting,” said Marc Chandler, managing director at Bannockburn Global Forex. “The $4460-$4510 area may be a reasonable technical objective. However, the outcome of the Fed meeting is the key. The Fed funds futures are discounting almost 90% chance of a hike, but economists surveyed by Bloomberg (Sept 4-9) are less sanguine. Only 13 of 48 expect a hike.”
“The failure to hike could see gold rally,” Chandler added. “A move above the $4540 area lifts the technical tone.”
“Lower,” said Adam Button, head of currency strategy at investingLive. “The Fed will hike, and that puts a downward bias into gold but if the statement and press conference isn't sufficiently hawkish, then gold could quickly rebound.”
“Up,” said Darin Newsom, senior market analyst at Barchart.com. “At this point Friday morning, the Dec futures contract has held its previous low daily close of $4,396.40 from September 1. This sets the stage for Dec26 to build bullish momentum, enough to take out its previous high daily close of $4,539.90 from September 3. Additionally, the 45-day moving average continues to increase, something algos are likely keeping an eye on. Dec26 has not closed below its 45-day since August 4.”
“What do the August PPI and CPI numbers mean for gold? Nothing, as far as I’m concerned,” Newsom said. “The Fed fund rate should go up, possibly twice yet this year - October and December? - but I don’t think it will strengthen the US dollar as it would be expected to because the rest of the world continues to sell the US. For obvious reasons. Meanwhile, central banks continue to buy gold. Also for obvious reasons.”
“Unchanged for now,” said Adrian Day, president of Adrian Day Asset Management. “Gold moving up in the face of higher US consumer inflation, strengthening the case for an interest rate increase next week, as well as higher Treasury yields, is a strong sign of underlying strength. The volatility in the Iran conflict means a reversal, in oil and the dollar, is always possible, and that would be negative for gold. But the strength in the face of headwinds indicates that gold is slowly forming a higher base, at the $4,300 level, before moving higher again.”
“Up,” said Rich Checkan, president and COO of Asset Strategies International. “Inflation came in as a mixed bag... PPI down slightly and CPI up slightly. So much for Fed independence. Chairman Warsh has enough wiggle room to not hike interest rates before the midterm elections. Gold will surge slightly as a result.”
Bob Haberkorn, senior commodities broker at StoneX Group, told Kitco News that precious metals prices can’t really go much lower, because rates probably can’t go substantially higher.
“The sell-off yesterday was so dramatic, already pricing in a hot [CPI] number here, that it was a muted response,” he said. “We're off a little bit, stocks are up, but oil is down, and that's helping the metals.”
“I've been seeing some bargain hunting coming into this market in gold and silver at the moment, but it's small,” he said. “I think a lot of people are on the sidelines; they want to get past the Fed on the 16th before doing much else. Also, a lot of people that are long-term bulls seem to be looking for hedges with concern going into next week.”
“Yesterday's sell-off was such a big move, I don't think there were enough sellers left to react to that CPI number,” he said. “I think between now and the 16th it's going to be a little quiet in metals.”
Haberkorn said the market is starting to sniff out the ceiling on the Fed rate.
“I don't think they can raise rates that much considering the situation that the Fed is in, the debt levels that are out there, and also the economic ramifications of higher rates,” he said. “I think they might just have to deal with higher inflation and see how it goes – this Iran war could wrap up – and leave rates be.”
“If they don't raise rates at the meeting on the 16th, we will see metals trade substantially higher into the end of the year,” Haberkorn said. “I could see a situation similar to what we saw last year. I'm pretty bullish.”
“I think gold will gradually work itself up to the target of $5,000 if they don't raise rates,” he added. “$5,000 is a big number here that I think it wants to get back to, and a lot of bullish people are expecting it to get back to those levels if they don't do a hike.”
Asked what the market’s sky-high expectations of a rate hike actually mean in this environment, Haberkorn said it’s what the data and the market situation imply the Fed should do, but not necessarily what the Fed will do.
“It's taking into account the data, the numbers, and what Treasury yields are doing at the moment,” he said. “It's taking into account the reality of the situation and what the Fed should do given the circumstances.”
If the market is solidly priced in for a hike and the Fed holds, Haberkorn said the market will address this gap through Treasuries.
“If they don't hike, I think the market will force yields higher through these bond auctions,” he said. “We're seeing it right now. And the way [the administration] will combat that – and this is very bullish for gold – they won't call it that, but it will be yield control. [Bessent] kind of let the market down with $5 billion this week, $5.1 billion is what they bought back, so I think you're going to see more of that.”
If the Fed’s actions do align with market sentiment and they end up delivering a 25-basis-point rate hike, Haberkorn expects a pullback in metals, but only a shallow one.
“If they do hike and they do a quarter, I think we will see metals pull back, but I don't think the pullback is going to be as bad as it normally would,” he said. “I just see a limit to what they can do with rate hikes.”
This week, 14 analysts participated in the Kitco News Gold Survey, with Wall Street sentiment leaning bullish once again despite gold’s weekly decline. Nine experts, or 64%, expected to see gold prices gain ground during the week ahead, while only two, representing 14%, saw the yellow metal falling further. The remaining three analysts, 21% of the total, expected the yellow metal to move in a volatile sideways channel.
Meanwhile, 218 votes were cast in Kitco’s online poll, with Main Street investors maintaining their mulish majority by the narrowest of margins. 115 retail traders, or 53%, looked for gold prices to rise next week, while 52 others, or 24%, predicted the yellow metal would lose ground. The remaining 51 investors, representing 23% of the total, expected to see consolidation during the week ahead.
Next week sees central banks return to the fore, and while the Federal Reserve’s interest rate decision tops the list, England and Japan will also deliver their monetary policy decisions over a compressed two-day economic news calendar.
On Wednesday morning, traders will be watching for the U.S. Retail Sales report for August, before all eyes turn to the Federal Reserve’s monetary policy decision at 2 pm ET, with markets firmly priced in for a 25-basis-point hike.
Then early Thursday morning, the Bank of England will announce its monetary policy decision, followed by weekly jobless claims and the Philly Fed manufacturing survey, then housing starts and building permits and pending home sales for August.
The week’s final economic news event of note will be the Bank of Japan’s monetary policy decision overnight.
Jesse Colombo, independent precious metals analyst and founder of the BubbleBubble Report, was looking at the technicals in light of Friday’s price action.
“I think investors were overly bearish this past week,” he said. “They were bracing for a very hot CPI number, and I think they went overboard with selling gold. It came in a little hotter than expected – not as hot as it could be – but I think investors were too pessimistic going into the CPI report. Not that I blame them, of course, because you just don't know how it's going to play out. But there was an excessive amount of pessimism, and gold immediately had a sigh of relief. Then what happened was it became overbought pretty quickly, and oftentimes when that happens, it'll take a breather, which is what we saw in the ensuing few hours.”
Columbo pointed out that spot gold bumped up against the $4,400 per ounce resistance level when it rallied post-CPI.
“$4,400 has played such a key role over the past year, a key support earlier this year, from February and late March,” he said. “Then it finally broke through in June, but that was a major support and resistance level the whole year, and it still continues to be very psychologically important. There was also a false breakdown on the daily chart where it briefly broke below $4,300, but it didn't stay below there. That's a good sign.”
Asked how he would be positioning himself in gold ahead of next week’s Fed decision, Columbo said he’d advise caution, but he’s optimistic about gold’s prospects coming out of the meeting.
“In general, I don't like to place bets ahead of major binary events like this,” he said. “I don't believe I have an edge in that regard. But I suspect that there's going to be a ‘buy the news’ rally, a relief rally,” he said. “Especially after today's CPI, these rate hike expectations will not come as a surprise to the market – this has already been well telegraphed going on for months – so a big part of me just believes that we should rip the Band-Aid off and get it behind us. There's so much speculation about, ‘is there going to be a rate hike or not?’”
“Maybe just hike. You can always lower it,” he said. “It looks like the Fed is behind the curve and should raise 25 to 50 basis points.”
Coming out of the FOMC, Columbo said he expects gold to rally a little if the Fed hikes, and a lot more if it holds.
“Also, as a final confirmation, I do want to see a solid close above $4,400,” he said. “That would be in conjunction with a relief rally from the Fed, or maybe them not even hiking, but I want to see it close above $4,400. If so, I think we're going to head up to $5,000 in the next few months. I would like to see a daily close at a minimum, with very strong volume on futures and also ideally in ETFs and mining stocks. You want to see volume come in because it shows institutions are backing the move.”
“If so, I think we're going to surpass the highs that we had in late August and keep heading on up to $5,000 as the next target.”
Alex Kuptsikevich, senior market analyst at FxPro, expects gold prices to rise higher next week.
“Rising government bond yields in major economies continued to draw capital away from precious metals,” he said. “However, in the gold market, as in the previous week, prices fell towards $4,300, shifting the balance of power in favour of buyers. This marked the third consecutive week of decline, with prices falling below the 50-week moving average. Nevertheless, we note a trend of buying on dips, which contradicts the bearish scenario of a downturn in such cases over the past fifteen years. In my view, last week saw a false breakout, as gold did not lose its support, unlike in similar episodes.”
“If the world is indeed becoming increasingly concerned about rising government expenditure on servicing the debt burden, investors will seek refuge in assets insulated from such risks,” Kuptsikevich said. “For now, central banks are following the market, raising key interest rates in response to rising bond yields. But the moment this is followed by increased volatility and risks to the economy, central banks will switch to rate management, keeping long-term yields in check, as has happened on numerous occasions since 2007. This creates a favourable environment for commodities, particularly gold.”
Michael Moor, founder of Moor Analytics, expects to see gold prices post gains next week.
“In a Higher time frame: I cautioned on 8/16/18 the break above $1,183.0 warned of renewed strength. We have seen $4,443.1,” he wrote. “These are ON HOLD. We held exhaustion with a 56268 high and rolled over $1,651.1. This is ON HOLD. On a medium timeframe basis: The trade below 52554 projected this down $740 (+)—we attained $1,300.0. The trade below 52036 brought in $1,248.2 of pressure. The trade below 51606 brought in $1,205.2 of pressure. These are ON HOLD. We held exhaustion with a 49177 high after a pullback and rolled over $962.3. The break below 48185 projected this down $185 (+)—we attained $863.1. The trade below 47923 projected this down $205 (+)—we attained $836.9. These are OFF HOLD. We held macro exhaustion with a 39554 low and bounced $799.6—if we continue in a bona fide bullish correction, the minimum target is 49636. This is ON HOLD.”
“On a lower timeframe basis: We held exhaustion with a 40190 low and bounced $736.0,” Moor said. “The trade above 41192 brought in $635.8. On 8/4 we left a bullish reversal—we have rallied $632.6 from the 41224. The break above 41389 projected this up 345.00 (+)—we attained $616.1. On 8/5 we left a major bullish reversal—we rallied $449.8 from 43052. These are ON HOLD. The break below 46369 brought in $307.7 of pressure. The break below 45886 (+10.8 tics per/hour) projected this down $205 (+)—we attained $259.4. These are OFF HOLD. The trade below 44227 (+5.5 tics per/hour) projects this down $65 minimum, $500 (+) maximum—we have attained $89.7 so far—however, we are also approaching to possible final exhaustion levels if in a correction, at 42954-655 and 41875-1327—and have entered into the ideal timeframe for one to hold more than temporarily. Decent trade back above 44383 (+5.5 tics per/hour starting at 11:20am) will warn of decent strength, likely for days.”
At the time of writing, spot gold last traded at $4,349.42 per ounce for a loss of 1.65% on the week but a gain of 0.75% on the day.
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