Gold prices need to see weak inflation as prices drop nearly 3 this week

Gold prices need to see weak inflation as prices drop nearly 3% this week

Gold prices could continue to struggle next week as Federal Reserve Chair Jerome Powell has "closed the door" to stop any potential dovish bias from creeping into the marketplace.

Thursday, at an event hosted by the International Monetary Fund, Powell said that the central bank is not "confident" that monetary policy is restrictive enough to bring inflation down to the 2% target.

Powell also said that the central bank would not hesitate to raise interest rates again if inflation pressures continued to rise.

Lukman Otunuga, manager of market analysis at FXTM, noted that gold prices are seeing their worst week in six as Powell maintains his tightening bias. December gold futures last traded at $1,939.90 an ounce, down nearly 3% from last week.

"Powell stated that the Fed remained cautious but was willing to raise rates if needed," he said. "Although traders are still pricing in a 10% probability of a rate hike in December, the timings of the Fed's first-rate cut have been pushed to July from June next year. After failing to conquer the $2000 psychological level, gold has the potential to extend losses. A solid breakdown and daily close below $1945 may open the doors towards the 200-day SMA at $1934."

Bart Melek, head of commodity strategy at TD Securities, said that Powell's comments continue to support U.S. dollar strength and elevated bond yields, two significant headwinds for gold.

"Because of the Federal Reserve's tightening bias, there is no big impetus to buy gold right now," he said.

Gold investors have again turned their focus back toward U.S. monetary policy as the geopolitical uncertainty that drove prices to $2,000 continues to weaken. Although Israel continues its ground assault in Gaza in its new war with Hamas, the conflict remains contained for now.

Although gold could see lower prices next week, it is holding up much better than oil, which is also suffering as the geopolitical fear trade continues to unwind. West Texas Intermediate (WTI) crude oil is seeing its third week of losses, its worst losing streak since late April.

At the same time, some analysts have noted that lower oil prices could work in gold's favor as it helps to cool inflation fears, giving the Federal Reserve room to ease back on its hawkish rhetoric.

However, Melek said a renewed focus on U.S. economic data, with particular attention being paid to next week's Consumer Price Index, means inflation pressures still have a significant way to drop. According to consensus estimates, economists are looking for 12-month inflation to rise 3.3%, compared to September's annual increase of 3.7%.

"The Fed has clearly said that it needs to get inflation under control, so if gold is going to find any support next week, inflation needs to be much closer to 3%," said Melek.

Barbara Lambrecht, commodity analyst at Commerzbank, said that although hotter-than-expected inflation could weigh on gold next week, any significant drop could be seen as a buying opportunity.

Capital Economics sees gold prices rising to $2,100 by year-end 2024

"If US inflation figures were to surprise to the upside, the gold price could fall further in the short term. In principle, however, we are convinced that the US rate cycle has peaked and that the mid-term outlook is positive for gold," Lambrecht said in a note Friday.

Along with inflation data, some analysts have said that gold could catch a safe-haven bid if retail sales numbers come in weaker than expected, signaling to markets that consumers are starting to stumble and unable to support current economic activity.

U.S. government debt will also be on the radar next week as the U.S. faces another potential government shutdown if Congress doesn't pass funding legislation by Nov. 17.

There are signs that global financial markets have become saturated with U.S. sovereign debt. Not only has the Federal Reserve's aggressive monetary policy tightening driven bond yields to 16-year highs, but the supply of government bonds hitting the market is starting to overwhelm demand.

Thursday, the U.S. government auctioned off $24 billion in 30-year notes and it was a significant disappointment as higher yields were needed to entice investors to buy U.S. government debt.

Some commodity analysts have said that any potential turmoil in the bond market could be positive for gold in the near term.

"If we look at the past month or so, it was the flying of yields that seemed to help gold in a sell-treasuries,-buy-gold type of trade," said James Stanley, senior strategist at StoneX Group. "A deeper inversion in 2/10 could be a positive for gold, but normalization of the curve could remain a bearish factor."

Stanley added that he sees gold prices continuing to consolidate in its broader range between $2,000 and $1,800 an ounce.

Economic data to watch next week

Tuesday: U.S. CPI

Wednesday: U.S. PPI, Retail Sales, Empire State Manufacturing Survey

Thursday: Weekly jobless claims, Philly Fed Survey

Friday: U.S. housing starts and building permits


Neils Christensen

For Kitco News


Time to Buy Gold and Silver

Tim Moseley

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