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

By

Neils Christensen

For Kitco News

Time to Buy Gold and Silver

Tim Moseley

Gold is well-positioned for when the Fed breaks something

The gold market may not be able to break out of its neutral trading channel around $1,950 just yet, but it is well positioned to benefit when sentiment turns, which could be sooner than some are expecting.

Yes, the U.S. has been able to avoid a recession and expectations of a soft landing continue to grow; however, many analysts remain doubtful that this optimistic goal can be achieved.

For many analysts, gold’s price action proves that investors are taking a more cautious stance to protect themselves against a downturn.

Gold’s position is even more impressive when you look at what it faced this week. Although the Federal Reserve did not raise interest rates on Wednesday, it maintained its hawkish bias. Federal Reserve Chair Jerome Powell said that although the interest rates are close to a peak, the central bank will keep interest rates at restrictive levels for the foreseeable future.

He added that the central bank will only know when rates are sufficiently restrictive when they see it.

The biggest surprise for many economists in this week’s decision is that the central bank sees only two potential rate cuts next year, down from the four rate cuts projected in June. This fits the growing “higher-for-longer” narrative that is building.

The Fed’s stance pushed 10-year bond yields to a fresh 15-year high at 4.5%. At the same time, the U.S. dollar index pushed above 105 points to its highest level since November 2022. Analysts at Commerzbank noted that real yields have reached 2%, an increase of 50 basis points from last month.

Despite all this, gold continues to hold around $1,950 an ounce, which has become an important psychological level.

In an interview with Kitco News, George Milling-Stanley, chief gold strategist at State Street Global Advisors, said that gold remains an important portfolio diversifier as the Fed continues to put pressure on the economy to cool down inflation.

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

"At the start of the year, I said that equity markets have more to fear from the Fed than gold does, and I still believe that," he said. "Yes, the economy has been very resilient so far this year, but Powell said on Wednesday that they still need below-trend growth to get inflation down to the 2% target. Investors should believe Powell when he says that, because he means it."

And it’s not just the Federal Reserve that is entering the end game. The Swiss National Bank, the Bank of England, and the Bank of Japan also left interest rates unchanged this week.

Both the SNB and the BOE said that they are close to getting inflation under control as economic growth starts to weaken. Gold performed well against both currencies after their monetary policy decisions.

Although the gold market lacks momentum while investors sit on the sidelines, Milling-Stanley noted that there is still significant growth potential in the marketplace. This week State Street released an update to its gold investor survey published in June. The updated analysis looked at the role financial advisors can play in developing the gold market.

The survey showed that 20% of respondents said they held some gold. In further analysis, the report said that roughly one-third of investors didn't invest in gold because they didn't know enough about how to invest in the precious metal.

"The main message from the analysts is that the future of gold investment seems to be safe. That is very, very good news," said Milling-Stanley.

Finally, let’s not forget central bank demand continues to provide a solid base. Analysts at The World Gold Council reported that Russia’s central bank bought 3 tonnes of gold last month, and Russia’s gold reserves are now back to their 2022 levels.

That is it for this week, have a great weekend.

By

Neils Christensen

For Kitco News

Time to Buy Gold and silver

Tim Moseley

Gold prices holding around $1,950 as Powell remains hawkish, but markets see no more rate hikes

The gold market has given back some of Wednesday's gains and prices are testing initial support around $1,950 an ounce after Federal Reserve Chair Jerome Powell said the Federal Reserve is prepared to hold interest rates at an elevated level for longer than expected to get inflation back down to its 2% level.

In a much-anticipated decision, the Federal Reserve on Wednesday announced that it would leave interest rates unchanged in a range between 5.25% and 5.50%. However, Powell maintained his hawkish bias, saying that a rate hike is still on the table at either the November or December monetary policy meetings.

However, he added that monetary policies will have to remain restrictive for the foreseeable future regardless of one last rate hike. The central bank remains committed to bringing inflation down to its 2% target, he said.

"We are fairly close to where we want to be," Powell said in the press conference following the central bank's decision. "We need to see convincing evidence that we are reaching our goals. The worst thing we can do is not restore price stability. It would be a miserable period."

The question for many investors is how long will the Federal Reserve maintain interest rates at these elevated levels. Powell said that it is too soon to tell if rates are restrictive enough and have been for long enough.

"You will only know when rates are sufficiently restrictive when you see it," he said. "The time will come when it will be appropriate to cut rates, but we don't know when that will be."

Although Powell maintains his hawkish bias, the gold market appears to be taking the latest monetary policy decision in stride. Gold has fallen from its session highs, last trading at $1,952 an ounce, roughly unchanged on the day.

According to some analysts, despite Powell's hawkish posturing, gold is holding its own as markets see only a 50/50 chance of one more rate hike this year.

"Gold is holding up nicely despite a hawkish skip as the risks that the economy will break are growing. Higher for longer has been mostly priced in for gold, but eventually bad news for the economy will lead to safe-haven flows for gold," said Edward Moya, senior market analyst at OANDA, in a note.

 Rising debt and debased currency will push gold prices to record highs – AuAG Funds' Eric Strand

Paul Ashworth, chief North American economist at Capital Economics, continues questioning the Federal Reserve's stance as it increased its economic outlook for this year and 2024.

"If the Fed is right about the economic outlook, then rates can unquestionably stay higher for longer. We just don't believe those forecasts. The real economy will be considerably weaker and, regardless, core inflation is going to fall back to target much more quickly. Under those circumstances, we still expect the Fed to leave rates unchanged over the remainder of this year and to cut rate cuts by closer to 200bp next year," he said in a note following the central bank announcement.

Thomas Simons, economist at Jefferies, said that he also doesn't expect the Fed to raise interest rates anymore this year and sees potential easing in early 2024.

"We have not changed our expectations for policy based on today's Fed communication. We still expect that 5.375% will prove to be the terminal rate in this cycle, and that the Fed will have to cut more aggressively in the first half of 2024 than what is priced into the market (nearly a 30% chance of another hike at the next meeting), or described in their dot plot," he said.

By

Neils Christensen

For Kitco News

Time to Buy Gold and silver

Tim Moseley

China lifts gold import limits after yuan recovers, lowering local gold premium

China’s central bank, the People’s Bank of China (PBoC), has lifted the temporary limits on gold imports that were aimed at supporting the renminbi, but which caused the local price of gold to skyrocket.

The spread between the spot price of gold in Shanghai and in London hit a record $121 per ounce last Thursday, but narrowed to $76 on Monday after the PBoC relaxed its import limits on the precious metal last week. Sources told the Financial Times that the central bank issued an informal order to some state and midsized commercial banks on Friday that the limits had been lifted.

In August, the PBoC decided to cut existing quotas and stop issuing new quotas to banks for the importation of international gold in an attempt to slow the surge in domestic gold purchases after the renminbi fell to its lowest level against the dollar in 16 years. The gap in the gold price had been steadily widening since early July, with industry insiders saying the rising premium was partially due to the curb on gold imports.

Last week, China’s central bank issued a strong statement warning currency traders against shorting the renminbi. “We will act when we act, resolutely correcting one-sided speculation,” the central bank said.

Local traders claimed the rhetoric from the PBoC was much stronger than usual and noted that state-run banks were more active than usual in exchanging U.S. dollars for renminbi on Monday.

The currency has come off its recent lows and is currently trading around Rmb 7.2938 against the greenback at the time of writing.

China’s central bank has itself been among the most active purchasers of gold this year, buying up 126 tonnes of gold through July. In August, analysts at BMO Capital Markets said they believe PBoC purchases are even higher than the reported numbers and could continue for years to come.

"Our analysis would certainly suggest that above-ground reserves of gold in China, both privately owned and those owned by the central bank, are significantly higher than annual consumer demand and official purchases might suggest," said Rory Townsend and Colin Hamilton, the authors of the report. "However, given the geopolitical backdrop and concerns over U.S. dollar dominance, we view further net additions to gold holdings as highly likely."

Currently, the People's Bank of China (PBoC) has the seventh largest gold reserves in the world at 2,113.50 tonnes, representing about 3.8% of total reserves. Analysts have speculated that the central bank is looking to increase its gold holdings to at least 5% of total reserves.

"At today's gold prices, this would require an additional 638t of PBoC purchases above current stated holdings," the analysts said.

In comparison, the U.S. has the world's largest gold reserves at 8,133.50 tonnes, representing 68.2% of total reserves.

By

Ernest Hoffman

For Kitco News

Time to Buy Gold and silver

Tim Moseley

Gold will fall to $1800 by year-end as inflation eases while the U.S. economy grows – Capital Economics

Gold is expected to fall to $1,800 per ounce by the end of the year as the US economy continues to grow and inflation pressures ease, according to analysts at Capital Economics.

“Since rising to around $2,000 per ounce on safe-haven demand (due to concerns about the stability of banks in the US and Europe) in March-May this year, the price of gold has fallen,” the analysts said in a recent report. “According to the World Gold Council, global demand for gold fell by about 5% y/y in the first half of this year, mostly due to lower investor demand via exchange traded funds,” while the gold supply increased slightly.

Capital Economics is forecasting more demand declines for the precious metal, “owing to an unwinding of investor demand for gold as a hedge against a severe economic downturn and high inflation,” they said. “This is because we expect the US economy to contract only marginally in the fourth quarter, before recovering next year.” They’re also forecasting that U.S. inflation will drop closer to the Federal Reserve’s 2% target by the middle of 2024.

“Admittedly, our US economic outlook is consistent with investor interest rate expectations falling,” they wrote. “However, we think that the downward pressure on investment demand from a ‘soft landing’ in the US will more than offset any upward pressure stemming from lower interest rate expectations.”

The analysts noted that gold prices have been “remarkably resilient” since the start of 2022 even as long-term real interest rates have risen sharply. “We suspect that one reason for this is that investors, after building up their ETF holdings of gold to record levels during the pandemic, were reluctant to reduce them when interest rates rose.

“This makes sense given that there has been a lot of uncertainty surrounding the economic outlook,” they said.

They also expect that the combination of high gold prices and the weakness of the Chinese and Indian currencies in U.S. dollar terms will continue to weigh on gold demand for jewelry through the second half of this year after it fell by 1% year-over-year in H1.

“Finally, the historically high gold price should continue to incentivise supply, too,” they said. “So, overall, we forecast that the gold price will fall from around $1,918/0z today to $1,800/0z by year-end.”

By

Ernest Hoffman

For Kitco News

Time to Buy Gold and silver

Tim Moseley

Price rebounds for gold, silver to end trading week

Gold and silver prices are higher in early U.S. trading Friday, on corrective bounces and short covering after both markets hit multi-week lows on Thursday. December gold was last up $7.70 at $1,940.40 and December silver was up $0.436 at $23.44.

Asian and European stocks were mostly higher overnight. U.S. stock indexes are pointed to mixed openings when the New York day session begins.

In overnight news, China again eased its monetary policy by cutting a short-term lending rate, one day after lowering the reserve requirement ratio for banks. Some slightly better economic data on Friday prompted this Wall Street Journal headline: "China data show signs of fragile economic recovery."

The key outside markets today see the U.S. dollar index weaker after hitting a six-month high on Thursday. Nymex crude oil prices are slightly higher and trading around $90.50 a barrel. Prices hit a 10-month high overnight. The benchmark U.S. Treasury 10-year note yield is presently fetching 4.33%.

  Gold price to hit $5,000 in 3 years, watch the default wave kick off a U.S. recession in Q4 – Michael Lee

U.S. economic data due for release Friday includes the Empire State Manufacturing survey, import and export prices, industrial production and capacity utilization, and the University of Michigan consumer sentiment survey.

Technically, the gold futures bears have the firm overall near-term technical advantage. Prices are trending lower again. Bulls' next upside price objective is to produce a close in December futures above solid resistance at this week's high of $1,954.60. Bears' next near-term downside price objective is pushing futures prices below solid technical support at the August low of $1,913.60. First resistance is seen at $1,947.50 and then at $1,954.60. First support is seen at today's low of $1,931.20 and then at this week's low of $1,921.70. Wyckoff's Market Rating: 3.0

The silver bears have the firm overall near-term technical advantage. Silver bulls' next upside price objective is closing December futures prices above solid technical resistance at $24.50. The next downside price objective for the bears is closing prices below solid support at $22.00. First resistance is seen at $23.75 and then at $24.00. Next support is seen at $23.00 and then at this week's low of $22.555. Wyckoff's Market Rating: 3.0.

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By

Jim Wyckoff

For Kitco News

Time to Buy Gold and silver

Tim Moseley

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.

  Gold shopping spree continues for Poland, Czechia and India, Uzbekistan also buys in August

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

By

Neils Christensen

For Kitco News

Time to Buy Gold and silver

Tim Moseley