The Fed is not ready to pivot now, but it might be soon

The gold market continues to hold its own as prices end the week slightly above $1,750 an ounce. The precious metal was once again thrown a lifeline by the Federal Reserve after the minutes from the November monetary policy meeting were deemed to have a dovish tilt.

According to the minutes, a majority of participants judged that a slowing in the pace of increases would likely be appropriate soon. The messaging is helping to solidify expectations that the U.S. central bank will raise interest rates by 50 basis points next month.

Although the gold market is keeping its head above the water, holding critical support levels, investors still appear to be reluctant to make any significant bullish bets. The lack of conviction is not surprising, as other pivot rumors throughout the summer have burned investors.

While the Fed is preparing to slow the pace of its rate hikes, many market analysts have pointed out that this is not a pivot. Markets still see the terminal rate in the Fed Funds above 5% and nobody knows how long rates will be kept at this level.

This will still be a difficult environment for gold. However, even if prices are capped at around $1,800, it is still important to note that despite the strong headwinds, gold continues to outperform the broader market and remains an important portfolio diversifier.

The French bank Société Générale has probably the healthiest outlook on gold. The bank made some significant adjustments to its multi-asset portfolio ahead of the new year. It is now heavily weighted in bonds. At the same time, it has only made a slight adjustment to its gold allocation. It now represents 6% of its portfolio, down from 7%.

Although the bank sees gold prices going lower next year, they still see value in holding the precious metal.

"Systemic risks are a common feature after a round of policy tightening of this kind," the analysts said. "Holding gold and CHF can help stabilize portfolio volatility, in our view."

Gold prices should be closer to $1,614 than $1,750 – Quant Insight

The system risks to the economy only continue to grow. This week Tavi Costa, portfolio manager at Crescat Capital, noted that 70% of the entire U.S. yield curve is now inverted. He added that every time this threshold has been breached, it has soon led to a recession.

Specifically, the yield on two-year notes is now 71 basis points higher than the 10-year yield. This is the widest gap in the inverted yield curve in more than 40 years.

Tavi noted that even if gold prices do go lower, there is solid value and potential in the precious metal that investors can't ignore.

With so much uncertainty in the marketplace, some analysts have said that it is only a matter of time before the Fed's slower tightening turns into outright cuts.

By Neils Christensen

For Kitco News

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