A higher for longer monetary policy is spooking gold; prices see the biggest drop in eight months

A higher for longer monetary policy is spooking gold; prices see the biggest drop in eight months teaser image

While central bank purchases and robust Asian demand have created a long-term uptrend in gold, uncertainty surrounding the Federal Reserve's monetary policy continues to generate significant short-term volatility.

At the start of the week, gold prices rallied to a record high above $2,450 an ounce as markets started to solidify expectations that the Federal Reserve was on track to cut rates two times this year.

However, the new breakout rally proved short-lived as gold prepares to end the week more than $100 lower. June gold futures last traded at $2,334.90 an ounce, down nearly 5% from its record highs; prices are down 3.4% from last Friday, its worst selloff in eight months.

The Federal Reserve's minutes from the April/May Federal Open Market Committee meeting show a hawkish sentiment, with the central bank reluctant to cut interest rates as inflation pressures remain elevated.

"Participants noted disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum and assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent," the minutes said.

The minutes also noted that some committee members are willing to raise interest rates if inflation continues to creep higher.

"This revelation pushed back rate cut expectations, with November replacing September as the likely timing for the first cut," said Ricardo Evangelista, Senior Analyst at ActivTrades. "This shift drove an increase in Treasury yields and a stronger dollar, punishing the price of the non-yielding precious metal."

Lukman Otunuga, Manager Of Market Analysis at FXTM, said that gold's selloff ahead of the U.S. Memorial Day long weekend could create more downside pressure for the yellow metal in the near term.

"With traders now only pricing one Fed rate cut in 2024, the scales of power could be shifting in favor of bears," he said.

Otunuga added that in the current environment, the gold market will be sensitive to next week's inflation data. The core Personal Consumption Expenditures Index (PCE), the Federal Reserve's preferred inflation gauge, will be released on Friday.

"Signs of cooling price pressures have the potential to rekindle Fed cut hopes, boosting gold prices. If the PCE report prints above market forecasts, this may deal another blow to Fed cut expectations – dimming gold prices even further," he said. "Talking technicals, the downside momentum could take prices toward the $2300 support level and lower. For bulls to jump back into the game, a move back above $2385 may be required."

Despite the broader bullish sentiment in the marketplace, some analysts note that near-term momentum is turning for gold .

"It certainly wouldn't be much of a stretch to see [gold] retest $2,300. This level, and the area just below, acted as support earlier this month, and it feels as if it wouldn't take much selling to push it back down there. But as ever, strong rallies can appear out of nowhere, particularly after significant pullbacks," said David Morrison, Senior Market Analyst at Trade Nation, in a note Friday.

Alex Kuptsikevich, Senior Market Analyst at FxPro, said he also sees signs of shifting near-term momentum in the marketplace; however, he added that the precious metal could be bought on dips.

"There is a divergence between the RSI and the price dynamics on daily timeframes, where a higher local price high corresponds to a lower peak in the Relative Strength Index. This is seen as a depletion of buying strength and often precedes a major decline or reversal," he said. "However, the latest decline may be a short-term correction, effectively letting off steam and clearing the way to the upside. Still, gold is above its 50 and 200-day moving averages."

Looking at gold's technical picture, analysts have said that investors and traders need to watch initial support between $2,300 and $2,285 an ounce.

In a recent interview with Kitco News, Nitesh Shah, Director of Research at WisdomTree, said that he expects official sector demand to support higher prices.

Shah explained that while central banks aren't focused on gold's price as they look to diversify their reserves, they will still be opportunistic and buy at a discount when they can.

"I suspect, every price dip we see, central banks will be buying. They know that if they want a cheaper price, they had better load up now because the price is only going higher," he said.

With central bank demand providing solid support in the marketplace, Shah said it is only a matter of time before Western Investors jump in.

While Friday's inflation numbers will be the main focus in the shorted trading week, economists will pay close attention to updated GDP numbers and consumer confidence data.

Economic data to watch next week:

Tuesday: US Conference Board Consumer Confidence,

Thursday: Preliminary U.S. Q1 GDP, weekly jobless claims, pending home sales

Friday: US PCE and personal income and spending

Kitco Media

Neils Christensen

Time to Buy Gold and Silver

Tim Moseley

Wall Street sees gold price declines or consolidation next week, Main Street is more optimistic about gains

Kitco NEWS has a diverse team of journalists reporting on the economy, stock markets, commodities, cryptocurrencies, mining and metals with accuracy and objectivity. Our goal is to help people make informed market decisions through in-depth reporting, daily market roundups, interviews with prominent industry figures, comprehensive coverage (often exclusive) of important industry events and analyses of market-affecting developments.

Wall Street sees gold price declines or consolidation next week, Main Street is more optimistic about gains teaser image

This past week was thin on economic data, so gold prices began the week coasting along at their newly elevated levels coming out of last week's fresh all-time highs.

After opening the week on Sunday evening trading at $2,421.20 per ounce, spot gold stayed comfortably above the 2400 level until shortly after 10:00 am EDT Wednesday morning, when it broke decisively through support and began its steady descent. The release of the minutes from the April/May FOMC meeting later Wednesday afternoon did the yellow medal no favors, as markets digested the news that some voting members were open to hiking rates further if warranted.

Spot gold hit its weekly low of $2,325.46 shortly after 8:30 p.m. EDT Thursday, and as of Friday afternoon, it was trading less than $10 off that level for a loss of over 3.30% on the weekly chart.

The latest Kitco News Weekly Gold Survey has over three-quarters of industry experts believing gold prices have plateaued or will decline in the near term, while half of retail traders still believe the precious metal could climb higher in the coming days.

“Down,” said Darin Newsom, Senior Market Analyst at Barchart.com. “June Gold has more room to the downside to finish its 3-wave downtrend next week. This means the contract would be expected to take out Friday’s low (so far) of $2,326.30. Daily stochastics (a short-term momentum study) are above the oversold level of 20%, also indicating the contract has time and space to move lower.”

“I am neutral on Gold for the coming week,” said Colin Cieszynski, Chief Market Strategist at SIA Wealth Management. “Between the US holiday and the lack of major events heading into month end, it think it may be a quiet week.”

James Stanley, senior market strategist at Forex.com, believes this week’s price decline was more bump-in-the-road than roadblock.

“This week was a strong pullback but there remains quite a bit of support structure around the $2,300 area in both spot and futures,” Stanley said. “If bears can chew through that next week, there could be scope for a larger reversal, but given how the move priced in after a fresh high on Sunday night, this week seems more like a pullback in a bullish trend, at this point.”

“Up,” said Adrian Day, President of Adrian Day Asset Management. “We would expect a recovery rally from the big sell-off the last couple of days, and another attempt to break $2,400 convincingly. Whether gold will break above that level is not certain, but for next week, we expect a good rally.”

“Gold’s resilience to any pullbacks the last three months has been astonishing,” Day added.

Daniel Pavilonis, Senior Commodities Broker at RJO Futures, was looking at the factors weighing on the precious metal Friday. “I think a couple of things are pushing gold down,” he said.

First off, Pavilonis said, a pullback was to be expected after the precious metal made such a strong move higher last week.

“And I think this is just a near-term correction in rates to the upside,” he added, “ten-year yields moving back up to four and a half now, 4.46%. The high today was 4.499. We, we made a move from 4.3 up to around 4.5%, and I think that's really putting some pressure on the metals.”

That said, Pavilonis believes the pullback will be short-lived. “We may go a little bit higher than 4.5%, but I think it's also given an opportunity to buy metals,” he said. “And maybe not so much gold but some of the other metals that haven't caught up with gold, for instance silver. It started to make a move up to $32, $33 [per ounce]. We come back down to $30, if we can stabilize over there, I think we get another run up to $36, $38, somewhere around there.”

Pavilonis said gold might be a different story, however. “I think it'll grind higher up towards $3,000,” he said. “I don't think it's going to be as easy, but if the rate cuts are still in the mix, I think there is a high probability that we continue to move higher.”

“I think you're still going to see a lot of central banks buying, a lot of movement away from the dollar away from U.S. treasuries and into precious metals,” he added. “But in the near term, I think it's had a nice run-up and I'm looking for a little bit of a pullback here.”

“I still believe it’s got some downside, and I think it's appropriate, even on the longer-term move to the upside,” he concluded. “I would say until maybe the tail end of the first week of June, it starts to bottom out, and then maybe the beginning of the second week we can start buying again.”

This week, 14 Wall Street analysts participated in the Kitco News Gold Survey, and sentiment on the precious metal has largely soured for the near term. Only three experts, representing 21%, expected to see gold prices climb higher next week, while eight analysts, fully 57%, predicted a price decline. Another three experts, representing 21% of the total, see gold trending sideways during the coming week.

Meanwhile, 195 votes were cast in Kitco’s online poll, with Main Street investors decidedly sunnier in their outlook for the yellow metal. 94 retail traders, or 48%, looked for gold prices to rise next week. Another 50, or 26%, predicted they would be lower, while 51 respondents, representing the remaining 21%, expect prices to remain rangebound during the week ahead.

Next week will be another slow one for economic news releases, with U.S. markets also closed on Monday for the Memorial Day long weekend. Highlights will include the U.S. Conference Board’s Consumer Confidence report on Tuesday, the release of preliminary U.S. Q1 GDP, weekly jobless claims, and pending home sales on Thursday, and Friday’s U.S. PCE and personal income and spending report.

“Best guess is more of a pullback after the holiday, but holding long positions,” said Mark Leibovit, publisher of the VR Metals/Resource Letter.

Marc Chandler, managing director at Bannockburn Global Forex, also sees further downside risks for gold in the near term.

“Gold set a new record high to start the week, reaching $2450, perhaps in reaction to the crash that took the life of the Iranian president,” he said. “However, a stronger dollar and higher rates saw gold sell off hard and reach nearly $2325.”

“The new highs in the spot market were not confirmed by the momentum indicators, which are still headed lower,” Chandler observed. “We note some reports suggesting China’s demand has slackened. The week ahead sees lighter data, and this could facilitate some consolidation. The US two-year yield extended its recovery from 4.70% recently to nearly 5%. The light calendar suggests that the 5% area may hold.”

“A bounce in gold may be challenged initially in front to $2375,” he said. “Support is seen in the $2275-$2300 area.”

Michael Moor, Founder of Moor Analytics, was looking at both the short- and longer-term technical picture for gold on Friday.

“Technically speaking, we are likely in a higher-timeframe bearish correction against the move up from $1,876.60,” he said. “The trade below $2,434.30 got this bearish, and we've seen 108 points from that, and then the trade below $2,421.60 also projected this downward $60 an ounce-plus, and we've seen 95.3 of that. On 5/22, we got the minor bearish reversal above, and then yesterday left another bearish reversal above.”

“We are currently holding exhaustion, final exhaustion is at $2,330 to $2,321.40,” Moor said. “Now, if we take that out and settle below there, then this is going to head down to $2,285.20 and it will confirm that we're in a larger correction as well. Then those next levels of possible exhaustion are going to be down at $2,239.60, to $2,235, and then lower.”

“Right now, I think that we're in a lower-timeframe bearish correction, and likely in a higher-timeframe bearish correction,” he explained. “So what does that mean? The lower-timeframe bearish correction means we're correcting against the most recent move up from $2,285.20. The higher-timeframe correction means we're also likely correcting against the move up from $1,876.60.”

“I think we're in both at the same time,” he said. “It's just that we could always run up and make another higher high and then correct from there. But right now, it looks like we're in a bearish direction in both time frames. And if we're in the higher-timeframe bearish correction, the ideal time for one of these lower exhaustion levels to hold is not until after the 21st of June. So we may see this coming off and consolidating and chopping around with big swings until that point.”

“If it's a new bear trend, it's a bear trend and it's going to blow through all of them,” he added. “But if it's going to hold one of them and start a new bullish structure, the likely timeframe for one of these exhaustion levels to hold more than temporarily is probably not until after the 21st of June.”

And Kitco Senior Analyst Jim Wyckoff sees gold prices declining further next week. “Steady-lower as serious near-term chart damage inflicted this week, including bearish double-top reversal on daily chart,” he said.

Kitco Media

Ernest Hoffman

Time to Buy Gold and Silver

Tim Moseley

Gold still on track to hit $3,000 as U.S. debt burden grows – Maison Placements Canada’s John Ing

Gold still on track to hit $3,000 as U.S. debt burden grows – Maison Placements Canada’s John Ing teaser image

After hitting record highs above $2,450, the gold market is again struggling as hawkish sentiment from the Federal Reserve spooks markets; however, according to one market analyst, gold’s rally is far from over.

In his latest gold commentary, John Ing, President and Chief Executive Officer of Maison Placements Canada Inc., reaffirmed his price target, expecting the precious metal to rise to $3,000 an ounce within the next 18 months.

Although the Federal Reserve’s aggressive monetary policy has increased gold’s opportunity costs as a non-yielding asset, Ing said that the government’s burgeoning debt is overshadowing current monetary policy.
 

“More than anything, gold’s push through $2,400/oz was due to rising U.S. debt, which caused money to flow into gold for defensive purposes,” he said in the report published last week. “Since March, gold has been up $500 an ounce, setting numerous all-time highs as the monetization of debt became an instrument of public policy. Americans can carry a lot of debt, but as the burden grows, the sustainability of their monetary and fiscal policies leaves little margin for error.”

Ing Warned investors that rising protectionist sentiment, led by the U.S., could exacerbate growing debt concerns, making the U.S. dollar “the weak link” in global financial markets, which would benefit gold.

“Gold is universally fungible and finite. Gold can be bought and sold in US dollars and thus is an alternative to fiat money for both central banks and investors, particularly since gold is also outside the Western-based system,” Ing said. “The Saudis are selling oil for yuan, and China has grown to be their biggest consumer. This signals a fundamental shift in power from the West to the East, with the petroyuan taking the place of the petrodollar.”

Ing explained that China’s growing appetite for gold will further pressure the U.S. government’s fiscal situation. He noted that China’s U.S. Treasury holdings have dropped to a 14-year low at $775 billion. As it sells U.S. bonds, the central bank has been buying gold, increasing its reserves for the last 18 consecutive months.

“China’s diversification moves gives them more options which could further affect its huge holdings of U.S. Treasury bonds at a critical time since America needs others like China to help finance its whopping national debt at $34 trillion that is bigger than the combined economies of China, Germany, Japan, India and the UK,” he wrote in the report.

“Dollars are being utilized less and less as bullion gains a greater percentage of the reserves held by central banks worldwide. For China, gold is the new critical mineral,” Ing added.

At the same time, Chinese retail investors are also significantly impacting gold demand. Ing noted that Asia has become a leader in the gold market as the Shanghai Gold Exchange has emerged as the largest physical dealer in the world.

“We believe fiscal, monetary and geopolitical uncertainties have driven investors into gold as an alternative currency, or the classic store of value,” he said.

Along with his bullish outlook on gold, Ing said he sees potential and value within the mining sector, even as costs increase.

“The group is undervalued on multiple fundamentals (market cap/reserves, earnings, cash flow and balance sheets) particularly against the overvalued S&P 500,” he said. “We continue to like the senior producers like Barrick, and Agnico-Eagle. Developers are the next group, bringing on mines over the next couple years like B2Gold, Endeavour Mining, McEwen Mining and Eldorado. There are many explorers that are very cheap. But instead, we have focused on those players with advanced PEAs or FS which are likely to get financed in this current bull market.”

Kitco Media

Neils Christensen

Time to Buy Gold and Silver

Tim Moseley

Gold prices remain under pressure as Fed sees possible rate hikes if inflation picks up

Although U.S. monetary policy has become a secondary factor in the gold market, persistent inflation could create some further selling pressure as it could force the Federal Reserve to raise interest rates again, according to the minutes from the Apri/May Federal Open Market Committee meeting.

In recent days, members of the monetary policy committee have said that while they are not ready to cut interest rates as inflation remains stubbornly elevated, they are also not looking to raise them.

However, the minutes of the meeting show that another rate hike could be a possibility.

“Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate,” the minutes said.

The gold market is not reacting significantly to the latest minutes. It is experiencing solid selling pressure as support at $2,400 broke down. June gold futures last traded at $2,390.20 an ounce.

The minutes reflected growing disappointment that consumer prices haven’t made better progress moving back towards the 2% target.

“Participants discussed the risks and uncertainties around the economic outlook. They generally noted their uncertainty about the persistence of inflation and agreed that recent data had not increased their confidence that inflation was moving sustainably toward 2 percent,” the minutes said.

“Participants noted disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum, and assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent,” the minutes also said.

Although the central bank is not expected to shift its monetary policy stance anytime soon, the committee is looking at other factors that impact market liquidity.

The minutes said that nearly all participants expressed support for the decision to begin to slow the pace of decline of the Federal Reserve’s securities holdings in June by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion, maintaining the monthly redemption cap on agency debt and agency mortgage‑backed securities (MBS) at $35 billion, and reinvesting any principal payments in excess of the $35 billion cap into Treasury securities.

“Some participants commented that slowing the pace of balance sheet runoff would help facilitate a smooth transition from abundant to ample reserve balances by reducing the likelihood that money markets experience undue stress that could require an early end to runoff.

Kitco Media

Neils Christensen

Time to Buy Gold and Silver

Tim Moseley