(Kitco News) – Gold prices suffered another sharp weekly decline as rising oil prices, persistent inflation fears, and expectations for further Federal Reserve tightening overwhelmed safe-haven demand, while Thursday's technology-led equity selloff triggered another wave of liquidations that pushed the precious metal back below $4,000 per ounce.
Spot gold kicked off the week trading at $4,164.69 per ounce on Sunday evening, and the yellow metal managed to eke out some early gains as traders continued to assess renewed U.S.-Iran tensions and the inflationary impact of disruptions around the Strait of Hormuz. But the rally quickly stalled, with gold setting its weekly high of $4,190.17 per ounce early Monday morning before sellers took control as rising energy prices and elevated Treasury yields reinforced expectations that the Fed would maintain their restrictive monetary policy.
The selling accelerated through Monday and Tuesday trading, with gold breaking below $4,150 as markets continued to digest the previous week's hotter-than-expected CPI and PPI reports. The yellow metal attempted to stabilize on Wednesday as Treasury yields eased, but the recovery proved short-lived as traders remained focused on the risk of another Fed rate hike before year-end.
Gold prices plunged Thursday as a sharp technology-led equity selloff triggered broader market liquidations, even as Treasury yields and the dollar weakened. Renewed concerns about the AI sector and speculation about possible intervention in the Japanese yen added to the uncertainty, while renewed Middle East tensions pushed oil prices higher. The selling carried over into Friday, with gold set its weekly low of $3,975.10 per ounce – its lowest level since early June – around an hour after the North American open, and prices oscillated on both sides of $4,000-per-ounce heading into the weekly close.
The latest Kitco News Weekly Gold Survey showed Wall Street pessimism on the rise after gold’s steep slide, while Main Street saw more silver lining despite the yellow metal’s recent underperformance.
“Gold, basis spot, was sold to a new three-month low before the weekend, slightly below $3990,” said Marc Chandler, managing director at Bannockburn Global Forex. “It recovered but the technical tone still looks weak. The momentum indicators are not rising and the five- and 20-day moving averages are falling. Initial resistance is seen in the 4065-4075 area.”
“Half of the G10 central banks meet next week and only the RBNZ is likely to hike,” Chandler added. “Still, the others, including the Fed, will keep the door open to hikes before the end of the year.”
“Unchanged,” said Adrian Day, president of Adrian Day Asset Management. “More back and forth, but still think $4,000 will hold, or maybe just a little below.”
“Up,” said James Stanley, senior market strategist at Forex.com. “The $4k test has held so far, and while it may take a bit for the tide to turn, I think the case is still strong for $4k support – unless something breaks in the US economy which could lead to a risk aversion run. But even in that backdrop, I’m biased towards longer-term accumulation.”
“Up,” said Rich Checkan, president and COO of Asset Strategies International. “The sell-off in the stock market this week triggered margin calls. As always, investors seeking liquidity to meet those margin calls turned to THE most liquid asset on earth… gold. The selling pressure took gold back below $4,000 per ounce.”
“I do not expect gold to remain below $4,000 very long,” Checkan said. “Barring any surprises from next Wednesday’s interest rate announcement from the Federal Open Market Committee, I would expect gold to bounce off these lows as bargain hunters snatch up as much cheap gold as they are able.”
Kevin Grady, president of Phoenix Futures and Options, said gold continues to trade inversely to interest rates, but there’s also broader concerns impacting the yellow metal.
“We're all thinking about rates, and I know we're following daily yields and things like that,” he said. “But it's also the long-term picture that people are looking at and seeing that there is a crack in the bond market, and even historically, that rates are higher.”
It's hard to see, because you're not really getting a lot of color,” Grady said. “A lot of commercials have decreased their trading. You're not seeing the volumes that we've had in the past. I think it's one of those things where gold has been trying to see the next leg up, and we just haven't had it.”
Grady said that a number of longs came into the market as gold posted its recent gains, and they were waiting for a good exit, but it didn’t come, and now they have no choice but to exit at lower prices and into thin liquidity.
“When you look at daily volumes at 129,000 contracts, that's what we used to do in open outcry! Once the markets went electronic, we were doing over 400,000 easily,” he said. “I think what's happening now is that it's very thin, and when you see people start to get out, it's just exacerbated the moves.”
Grady said that between the Iran war’s renewed threats of escalation, Russia-Ukraine getting worse, the risk of a hawkish Fed next week, and the looming midterm elections, people are wary of putting their money into the markets – any markets.
“That move [on Thursday], I think scared a lot of people away from saying, ‘Hey, let me go in right before a big meeting or a big decision where I don't know where it's going to be, and let me take a position.’ Because getting out of that position can be deadly.”
“I think that move yesterday is going to put a lot of people on the sidelines.”
Turning to Wednesday’s Fed meeting, Grady said that even if markets are pricing in a hold, under current conditions, they really can’t be sure
“What is the Fed going to do? The market's saying, no, he's not going to raise rates, but maybe he tries to shock people,” he said. “I don't think he should, but you just don't know. There's just too much uncertainty. A lot of people, especially professional traders, are saying, ‘This isn't trading right now, it's guessing.’”
“I was speaking with a friend of mine yesterday who's a big trader on the floor with me, in gold, and we were talking about [this],” he said “It isn't just that you’re a trader and you're putting on positions. As a trader, you're a risk manager. And if you're not a good risk manager, you're not going to be a successful trader. I think right now, when you look at the upside or downside to putting on a trade, what are the odds of this trade working? Markets have gotten so thin… I just think the upside is not worth it.”
Grady said that if gold does see a break below $4,000, we’ll soon be approaching levels where prices held during earlier selloffs.
“But I will tell you, underneath those levels is going to be stops, and everyone knows that,” he said. “Being long in front of those… it's always nice to buy in front of the support level, but when it breaks that support level, it could be dangerous. So I think people have to really watch out.”
This week, 17 analysts participated in the Kitco News Gold Survey, with the largest portion of Wall Street sentiment sliding into the bearish camp after gold’s precipitous drop below $4,000. Four experts, or 24%, expect to see gold prices gain ground during the week ahead, while seven, representing 41%, see the yellow metal declining further. The remaining six analysts, 35% of the total, said they couldn’t predict gold’s direction, or expected sideways trading next week.
Meanwhile, 161 votes were cast in Kitco’s online poll, with Main Street investors considerably more bullish than their professional counterparts despite gold’s late-week slide. 67 retail traders, or 42%, looked for gold prices to rise next week, while 41 others, or 26%, predicted the yellow metal would lose more ground. The remaining 53 investors, representing 33% of the total, expected to see consolidation during the week ahead.
Central banks will dominate next week’s economic news, with rate decisions from the Federal Reserve, European Central Bank, Canada and Japan, but markets will also have a raft of growth, consumer and housing data to digest.
The U.S. calendar kicks off Tuesday morning with Durable Goods Orders, Consumer Confidence, and New Home Sales.
Then on Wednesday morning, the Bank of Canada will issue its monetary policy decision, followed by the Federal Reserve’s monetary policy decision in the afternoon.
Thursday morning will see the ECB’s monetary policy decision, along with Advance US Q3 GDP and PCE, and weekly jobless claims, with the Bank of Japan’s monetary policy decision coming overnight to cap the week’s key data.
Sean Lusk, co-director of commercial hedging at Walsh Trading, said the Iran conflict – and its impact on oil prices, inflation expectations, and Fed rate projections – continues to cap gold’s potential gains.
“It's just an impediment to any rally in gold,” he said. “Now, there could be an 11th hour deal over the weekend for a ceasefire, but I don't know… It looks like the market, at least the energy space, is really priced in that this thing is going to escalate in the near term. Big time.”
Lusk said he’s optimistic about productivity gains from AI, but the broader economy won’t do well for a while.
“Bond yields aren't coming off anytime soon, which means housing prices are still going to decline – obviously there's going to be winners and losers in that space – but if you do have declining home values, where the sellers far outpace buyers by a wide margin, I don't think gold in that context is still at $4,000 an ounce. It's still rather elevated here.”
“A couple things have to happen [for gold to resume its uptrend],” he said. “The strait has to be reopened, and these wars have to end. It doesn't look like either of those things are going to happen anytime soon. And it could get really ugly here before it does.”
Lusk said he wouldn't be surprised if gold sold off further in the near term, though he expects buyers to be enticed back into the market in that scenario.
“I think you're going to have some buying down there below $4,000, and below $50 in silver, which we're a stone's throw from,” he said. “I think after the smoke clears, you’re hoping if you’re a buyer that silver does get down to $48, and gold gets down to $3,500, and then come back in and buy,” he said. “That's what I'm thinking may happen. But I can't speak to that. You don't know what's going on behind the scenes.”
Alex Kuptsikevich, senior market analyst at FxPro, expects gold prices to rise off their lows next week.
“Since the start of October, gold had been receiving consistent support as it declined towards the $4,100 level, but on Thursday this trend was broken when we saw a virtually simultaneous sell-off in Bitcoin, gold and the NASDAQ-100,” he said. “However, the rules of the game have not changed fundamentally, and gold continued to attract buyer demand after a brief dip below $4,000. For over a year now, solid demand in the 3,950–4,100 range has been driving the price higher. Of course, things may turn out differently this time, and the decline may continue. However, in the short term, the downward move appears excessive, suggesting at least a corrective rebound in the coming days.”
“We note that gold has lost its inverse correlation with oil, whilst expectations regarding the Fed’s key interest rate have ceased to tighten,” Kuptsikevich added. “Indeed, we are increasingly seeing a reassessment of expectations towards a slower pace and a reduction in the scale of key interest rate rises.”
Michael Moor, founder of Moor Analytics, expects gold prices to slide further next week.
“LOWER unless we break back above the formation mentioned below,” he wrote. “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. These are OFF 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 ON 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. 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. This is ON HOLD,” Moor said. “The break below 46369 brought in $636.0 of pressure. The break below 45886 projected this down $205 (+)—we attained $587.7. The trade below 44227 projected this down $65 min, $500 (+) max—we attained $421.8. The break below 43582 brought in $357.3 of pressure. These are OFF HOLD. The break back below the 42183 and 42167 lines brought in $217.4 and $215.8 of pressure respectively. The break back below 41979 (-4.6 tics per/hour) brought $197.0 of pressure. The trade below 41014 (+.3 of a tic per/hour) projects this down $120 (+)—we have attained $100.5, but decent trade back above where this comes in today will warn of decent strength.”
At the time of writing, spot gold last traded at $3,995.81 per ounce for a loss of 4.12% on the week and 0.71% on the day.
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