With gold ending the week above $1,900, analysts turn their focus to $2,000
Welcome to Kitco News' 2023 Outlook Series. Uncertainty continues to dominate financial markets as central bank monetary policies push the global economy into a recession to cool down inflation. Stay tuned to Kitco News to learn from the experts on how to navigate turbulent financial markets in 2023.
The gold market is ending the week at a nine-month high as renewed safe-haven demand pushed prices above $1,920 an ounce, which some analysts highlighted as an important resistance level.
Analysts have said that rising economic uncertainty and shifting market fundamentals could help push prices back to $2,000 sooner than expected.
February gold futures are looking to close the week with roughly 1% gain, with prices last trading at $1,922.80 an ounce.
"There is a gravitational pull to $2,000 and it will only build as prices continue to move higher," said Phillip Streible, chief market strategist at Blue Line Futures.
Gold's late afternoon rally came after U.S. Treasury Secretary Janet Yellen sent a letter to Congress warning lawmakers that the government could hit its debt limit on Jan. 19.
picGrowing fears that the U.S. could potentially default on its debt obligations have increased recently as the Republican Party's slim majority in the U.S. House of Representatives is expected to complicate negotiations. Some Republican politicians have already said that any rise in the debt limit needs to be accompanied by deep spending cuts.
"We knew the debt issue was going to be a problem in 2023, but we weren't expecting it to rise to prominence so soon," said Edward Moya, senior North American market analyst at OANDA. "The short-term reaction in gold is warranted, giving how much uncertainty there currently is."
However, Moya added that while near-term safe-haven demand should continue to support gold prices, there are much bigger factors impacting the gold market.
"It's just too early to see how this will play out. In the short-term, it's positive for gold, but if there is any major chaos, that would support the dollar and weigh on gold," he said.
Moya said that for gold, he sees some resistance at $1,950 an ounce, and if that breaks, there is not much to stop the market from rallying back to $2,000 an ounce.
"There is lots of momentum in the market right now and I think $2,000 is a target is just a question of when we get there," he said.
This is why you will see high premiums on American Eagle silver coins in 2023
Federal Reserve's monetary policy remains the critical driver for gold
Looking past the near-term volatility, analysts have said that the most significant influence on gold remains shifting expectations regarding the Federal Reserve and the impact easing inflation is having on bond yields and the U.S. dollar.
Consumer inflation data this past week showed that price pressures are cooling in line with expectations, which some analysts have said gives the Federal Reserve room to slow the pace of its aggressive monetary policy stance.
According to the CME's FedWatch Tool, markets see a more than 90% chance that the U.S. central bank will raise the Fed Funds rate by 25 basis points next month.
Investors anticipating that the Federal Reserve is closer to the end of its tightening cycle have pushed bond yields lower and weighed heavily on the U.S. dollar.
The U.S. dollar index is looking to end the week at its lowest level in seven months as it tests support at 102 points.
Kevin Grady, president of Phoenix Futures and Options, said that investors are seeing a fundamental change in financial markets, supporting gold prices, even if market momentum looks technically overstretched.
"I have been waiting for a fundamental change in the marketplace and I think we are starting to see that," Grady said. "The bond market is signaling that interest rates will be lower than what the Fed is saying and that is bullish for gold."
Pay attention to the U.S. dollar; it looks oversold
Although gold prices have room to move higher next week, some analysts have said that investors should use some caution at these levels and not chase the market.
While many analysts are solidly bullish on gold in the near term, they have said that investors should look to buy the precious metal on dips.
Darin Newsom, senior market analyst at Barchart, said that he sees higher gold prices as both the short-term and medium-term trends are decidedly up.
However, he added that bullish investors might have to be agile as gold could rapidly correct. He said that the key to gold's short-term momentum will be the U.S. dollar, which he said is sharply oversold. He noted that 102.17 is an important retracement level from last year's historic rally.
"When [gold] decides to turn, and it could be some point next week, it could fall fast," he said. "Markets take the stairs up and the elevator down."
Marc Chandler, managing director at Bannockburn Global Forex, said he also sees the U.S. dollar as oversold. He noted that although inflation is cooling, the Federal Reserve is still expected to raise interest rates, which could help stall the greenback's downward momentum.
Davos and economic data to watch
Although the U.S. will see a shortened trading week with markets closed Monday for Martin Luther King Jr. Day, there will be plenty of economic data to digest throughout the week.
Analysts have said the market could be sensitive to comments made during the annual World Economic Forum, which kicks off in Davos next week. The WEF has already raised concerns about rising geopolitical uncertainty and the continuous threat of inflation. Analysts have said that any grim outlook could further boost gold's safe-haven appeal.
The markets will also receive more retail sales numbers, inflation data and regional manufacturing numbers from the New York Federal Reserve and the Philadelphia Federal Reserve.
Economists have also said that investors need to keep an eye on the Bank of Japan's monetary policy decision as that could provide some bullish momentum for the U.S. dollar, which in turn would weigh on gold.
Tuesday: Empire State manufacturing index, Bank of Japan monetary policy decision
Wednesday: PPI, Retail sales
Thursday: Philly Fed Survey, weekly jobless claims, housing starts and building permits
Friday: Existing home sales
By Neils Christensen
For Kitco News