(Kitco News) - Gold is ending another week in negative territory as the market continues to fight for support around $4,300 an ounce. Despite significant downside risks, analysts note that prices remain fairly resilient.
Gold’s selloff has been limited this past week, even as yields on U.S. 10-year notes have pushed to a two-decade high of 5.20%. At the same time, spot gold last traded at $4,292 an ounce, down more than 2% from last Friday.
“The market is increasingly pricing in earlier-than-expected interest rate hikes in the US, which is pushing up US bond yields and, consequently, real interest rates,” said Barbara Lambrecht, Commodity Analyst at Commerzbank. “This increases the opportunity cost of holding gold.”
However, the German bank also put current gold prices into perspective, noting that two months ago, gold was fighting to hold support at $4,000 an ounce, when bond yields and interest rate expectations were significantly lower.
“It is encouraging that investors with a longer-term orientation remain invested in gold ETFs. We therefore consider the potential for a correction to be limited,” said Lambrecht.
Neil Welsh, Head of Metals at Britannia Global Markets, said that despite the selling pressure, the gold market has a structural cushion due to robust central bank purchasing, persistent geopolitical tensions and deepening fiscal concerns.
In an interview with Kitco News, Joy Yang, Global Head of Index Product Management at MarketVector Indexes, said that gold also appears to be benefiting from low equity market volatility.
The S&P 500 continues to hold near record highs above 7,000 points, even in an environment of rising inflation and elevated bond yields.
“It feels like equity investors are complacent to growing risks in the bond market, but I would suspect that some of these investors are using gold as a hedge and are just waiting to see if inflation pressure will start to ease,” she said.
While many analysts see limited downside risks for gold, the precious metal is not expected to be immune from further selling pressure next week as bond yields remain above 5%.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that he will be watching new support at $4,235 an ounce next week.
“A break could expose the market to a deeper correction and potentially renewed focus on the June-July area around USD 4,000,” he said. “Conversely, an ability to withstand the current onslaught from rising yields and dollar strength would underline the resilience of underlying demand, with a break above USD 4,400 resistance, in my opinion, needed to change the current defensive focus.”
Waleed Said, Market Analyst at GivTrade, said that support at $4,000 an ounce is an achievable target, as aggressive expectations that the Federal Reserve will have to raise interest rates through year-end are not overpriced, with inflation remaining well above the central bank’s 2% target.
“As long as yields stay this elevated, I see the risk tilted to the downside,” he said. “If the Fed follows through with more hikes and yields stay sticky, a move toward $3,800 is a scenario I wouldn't rule out.”
Looking through the short-term doom and gloom, some analysts see a potential break in the rain clouds next week, as economic data could play an important role in gold’s next move.
The economic docket next week is filled with critical reports, including the latest Personal Consumption Expenditures (PCE) Index, which is expected to highlight stubborn inflation pressures. The week ends with the September Nonfarm Payrolls report, which will show how the labor market is holding up in the current economic environment.
Other important economic reports include national manufacturing data and private-sector employment numbers.
Analysts have said that gold investors should pay particular attention to labor market data, as it could have a greater impact than inflation data.
“A softer-than-expected jobs and wage print could trigger a downward move in yields and the dollar, unlocking immediate upside for gold,” said Welsh. “Conversely, a hot labour report would likely reinforce the dollar's strength, pressuring gold lower.”
Said noted that the last time U.S. employment data missed expectations, markets drastically shifted their interest rate forecasts, taking rate hikes off the table.
Monte Safieddine, Head of Research at Capital.com, said that he will be paying attention to PMI data next week. He noted that gold has held up well as investors have been reluctant to jump into the bond market because underlying structural issues are not being addressed.
“What might help alleviate the matter partially is weaker economic data after decent prints via preliminary PMIs and claims. Next week's PMIs as well as labor data will need to show some clear weakness to convince the Fed to talk a little less hawkish,” he said.
Looking beyond next week’s potential volatility, many analysts continue to see weakness in gold as a long-term buying opportunity, and elevated rates could ultimately be the trigger that ignites a new rally.
“The last time yields were this high, US debt was around $8.9T. Today it's over $40T, which means every 1-point rise in average borrowing costs adds roughly $400bn a year in interest. That isn't sustainable at 5%+ yields indefinitely,” said Said. “Either growth slows and the Fed backs off, or inflation quietly erodes the debt and the dollar. Both outcomes support gold.”
Economic data to watch next week:
Tuesday: Reserve Bank of Australia monetary policy decision, US Consumer Confidence, US JOLTS job openings
Wednesday: US ADP Nonfarm Payrolls, US Final Q2 GDP, US PCE
Thursday: ISM Manufacturing PMI
Friday: US Nonfarm Payrolls
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