Gold price downside is shallow as Fed's messaging is limited next week
Gold prices remain firmly stuck in neutral as the tug-of-war between the Federal Reserve’s hawkish monetary policy bias and the risk of a potential recession continues to dominate the marketplace.
While gold has some technical momentum behind it, analysts say it doesn’t have enough fuel to break above significant resistance at $1,980 an ounce.
Heading into the weekend, December gold futures last traded at $1,945.60 an ounce, roughly unchanged from last Friday’s close. This is the fourth consecutive week that gold prices have ended Friday just below initial resistance near $1,950 an ounce, demonstrating how balanced the market currently is, according to some analysts.
The push and pull in the gold market will be on full display next week as the Federal Reserve releases its latest monetary policy decision and updated economic projections. The U.S. central bank is not expected to raise interest rates next week; however, Fed Chair Jerome Powell is expected to maintain a hawkish stance on monetary policy.
"Powell's presser and dot plot revisions might have a hawkish flavor to them as Fed officials aren't likely to close the door to further rate hikes,” said interest rate analysts at TD Securities.
The CME FedWatchTool shows that markets currently see a roughly 60% chance that interest rates remain unchanged through the rest of the year. However, these market expectations have been relatively volatile and can quickly change.
While Powell’s rhetoric could keep gold on a tight leash, analysts note that monetary policy is losing its effectiveness.
"The overall message among global central banks is that interest rate hikes are coming to an end and that is bullish for gold,” said Edward Moya, senior market analyst at OANDA. "Gold might not be ready to break out, but there are risks that central banks break something, which continues to support the precious metal.”
Colin Cieszynski, chief market strategist at SIA Wealth Management, said that gold is going to have a tough time breaking above $1,980 ahead of the U.S. central bank meeting. However, he added that the market appears due for a technical bounce.
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While gold is stuck in the near term, Cieszynski said its long-term bullish outlook remains firmly in place. He added that the autoworkers’ strike, which started Friday, serves to underline the economic challenges the Federal Reserve and other central banks around the world face. He pointed out that workers are asking for a significant rise in wages to combat inflation.
"Ultimately, central banks are running into problems. Wage inflation continues to increase. The inflation problem is not going away and that underpins gold,” he said.
Everett Millman, a precious metals expert at Gainesville Coins, said that gold’s resilient strength shows its potential. He noted that given the Fed monetary policy and where the U.S. dollar is currently trading, gold prices should be at least below $1,900 an ounce.
"A lack of clarity on the health of the global economy continues to support gold prices,” he said. "There is some fuel to keep gold prices above $1,900, but it doesn’t have enough to drive hit higher.”
While the Federal Reserve will garner most of the attention next week, markets will also receive monetary policy decisions from the Bank of England, The Bank of Japan and the Swiss National Bank.
Investors have been paying close attention to gold demand in Japan as a weak yen has driven record domestic demand for the precious metal. Gold is currently trading near record highs against the yen above ¥284,000, while premiums for physical bullion are also holding near all-time highs.
Next week's data:
Tuesday: U.S. housing starts and building permits
Wednesday: Federal Reserve monetary policy decision
Thursday: Swiss National Bank monetary policy decision, Bank of England monetary policy decision, Philly Fed survey, Existing home sales, Bank of Japan monetary policy decision
Friday: S&P flash PMI survey
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