Economic risks supporting gold in neutral territory around 1950

Economic risks supporting gold in neutral territory around $1,950

Federal Reserve chair Jerome Powell maintained his hawkish bias this week, saying that interest rates will have to remain in restrictive territory for the foreseeable future; however, the gold market remains firmly in neutral territory as uncertainty supports the precious metal.

Some analysts have said that gold has been able to withstand the Fed's posturing as risks for the global economy grow.

"Consumers are spending the last of their savings and higher interest rates will start to take their toll," said Ed Moya, senior market analyst at OANDA. "We think it's only a matter of time before we see a weaker economy, and that will not be good news for the U.S. dollar."

Heading into the weekend, December gold prices last traded at $1,944.90 an ounce, roughly unchanged from last Friday. Although gold is caught in a tight trading range, it has held firm against major headwinds as the 10-year bond yield pushed to a fresh 16-year higher at 4.5%. At the same time, the U.S. dollar is ending the week at its highest level since November 2022.

Ole Hansen, head of commodity strategy at Saxo Bank, said in his weekly commentary that economic uncertainty continues to support gold as a safe-haven asset.

"We conclude that the breakdown in normal correlations is likely due to a market in search of a hedge against the FOMC failing to deliver a soft as opposed to a hard landing, or even stagflation," he said.

Although gold is holding its ground, analysts have said it will be difficult for prices to rally in the current environment.

Carsten Fritsch, precious metals analyst at Commerzbank, noted that the rise in U.S. bond yields has pushed real yields 50 basis points higher compared to last month. He added that this is taking a toll on investment demand as investors liquidate positions in gold-backed exchange-traded products.

"Last week alone, they sold holdings totaling 16 tons," he said. "Holdings in the world's largest and most liquid gold ETF have meanwhile dropped to their lowest level since January 2020."

However, Fritsch also sees long-term bullish potential for the precious metal when sentiment starts to shift.

  Gold investment potential remains healthy despite Fed's hawkish stance – State Street's Milling-Stanley

"Net longs have plummeted by almost 75% within the past four reporting weeks," he said. "Against this backdrop, gold will doubtless find it difficult to come out of the defensive in the near future. That said, sentiment is now already so bearish that it wouldn't take much to spark a price recovery."

As for what could spark a new rally in gold, Daniel Ghali, senior commodity strategist at TD Securities, said investors should pay close attention to the data.

He added that disappointing GDP data will create fears that the U.S. economy could be in for a hard landing.

Markets will also be sensitive to further inflation data as the Personal Consumption Expenditures Index will be released on Friday.

Last week to visit a national park?

Along with economic data, some analysts have said that gold could attract some safe-haven demand as the U.S. government faces a potential shutdown as Congress has been unable to approve funding for the fiscal year starting Oct. 1.

Although a shutdown wouldn't impact the nation's sovereign debt, it would affect how it could conduct business domestically. Government employees would be furloughed.

Markets could be impacted as the Securities and Exchange Commission and the Commodity Futures Trading Commission would have to furlough most of their employees.

National parks and museums would also be closed during the shutdown.

Kristina Hooper, chief investment officer at Invesco, said that while economic growth might not be impacted in a short-term shutdown, it does increase uncertainty.

She added that it also brings attention to the United States' growing debt problem. The U.S. deficit has already exceeded $1.5 trillion in the 12 months to October of this year.

"Any concerns about the government's ability to handle its growing deficit is a positive for gold," she said.

Next week's data:

Tuesday: U.S. Consumer Confidence, new home sales

Wednesday: Durable goods

Thursday: Final GDP reading, weekly jobless claims, pending home sales, Jerome Powell speaks at Washington DC town hall event

Friday: Personal Income and Spending


Neils Christensen

For Kitco News

Time to Buy Gold and Silver

Tim Moseley

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