Market participants expect more clarity on rate hikes from next week’s Federal Reserve meeting. On the eve of this meeting, gold prices were stuck in a narrow range on Thursday.
“Gold will struggle to set direction ahead of FOMC”
Spot gold held steady at $1,785.59 after rising more than 1% on Wednesday as the dollar slumped. US gold futures were little changed at $1,797.30 The dollar index (DXY) was also flat. The weaker dollar makes gold more attractive to offshore buyers. Ilya Spivak, head of global macro at Tastytrade, comments:
Gold will likely struggle to build directional momentum one way or another until the Fed rallies. If the Fed result is in line with expectations, the market will relax as it is not worse than expected. In this case, it is possible for the dollar to weaken and this will support gold to some extent.
“Gold will likely trade in this range”
Most investors expect the Fed to raise interest rates by 50 bps on December 13-14. Investors are also watching the November Consumer Price Index (CPI) report dated December 13. OCBC FX strategist Christopher Wong says gold will likely trade in the $1,765-1,795 range ahead of the Fed meeting. He also adds that the focus is on how hawkish the Fed will look.
Meanwhile, the World Gold Council (WGC) announced that the holdings of global gold ETFs fell for the seventh consecutive month in November. But he noted that the exits were a modest 34 tons worth $1.8 billion.
“We are in standby mode before FOMC”
Bullion’s brilliance was overshadowed by recent strong US economic data. This has led to fears that the Fed will raise rates more than anticipated in the near future. Bart Melek, head of commodity markets strategy at TDS, comments:
Here we see rates falling along the curve. Also, there is some weakness in the US dollar. We’re just coming back from the lows. There is some doubt that traders are too quick to conclude that the US central bank will take a more dovish stance. We are now in a bit of a wait before next Wednesday’s FOMC.
“The performance of gold in the new year will depend on these”
Juan Carlos Artigas, head of global research at WGC, notes that over the past year, central banks, and in particular the Federal Reserve, have been working to quell inflation through repeated rate hikes. As a result, he states that the global economy is currently at a crossroads. He also states that the consensus points to a slight recession in 2023. Artigas makes the following assessment:
Gold’s performance in the new year will be shaped by the intertwining effects of economic growth, inflation and monetary policy, additional support from geopolitics and possibly a softening of the US dollar.
“A stable but positive performance for gold!”
According to the WGC report, the economic consensus forecasts weaker global growth with a brief and possibly localized recession, with high but falling inflation and the end of interest rate hikes in most advanced markets. This moderate recession scenario likely means headwinds and tailwinds for gold. This includes further weakening of the dollar as inflation recedes, geopolitical flare-ups that could provide support for gold, and an economic slowdown that could provide counterwinds to the metal.
“These mixed effects mean a stable but positive performance for gold,” WGC says. However, it also points to an unusually high level of uncertainty surrounding consensus expectations for 2023. The other two economic scenarios provide an outlook for gold.
WGC notes that the so-called “soft landing”, where business confidence has been restored and spending has rebounded, will likely pose downside risks to gold. Artigas says a soft landing is a “historically unlikely event.” He notes, however, that gold will see more headwinds as investors shift their focus to risky assets.
“Yellow metal performs well in these environments”
Meanwhile, according to the WGC report, there is a serious risk of recession. In addition, inflationary pressures will continue as geopolitical tensions rise. “Given the delay in policy transmission across the economy, over-prudent central banks risk over-tightening,” the report says.
The report emphasizes that all this will lead to more serious economic fallout and stagflationary conditions. He also notes that the blow to business confidence and profitability will likely lead to layoffs and increase unemployment significantly. Juan Carlos Artigas says that gold has traditionally performed well, especially in a stagflationary or much more severe recession environment. In this direction, it emphasizes the role of a strategic port.
“Gold’s potential for further gains is gradually diminishing”
cryptocoin.com As you can follow, gold had a very positive performance in November. Economists at Commerzbank, however, do not expect the yellow metal to hold its gains. In this context, economists make the following statement:
The potential for further gains will likely decrease gradually. While the cycle of rate hikes will end in the foreseeable future, interest rates will likely remain at their next high for a while.
According to economists, rate cuts will likely require a significant and permanent drop in inflation and the Fed’s return to its 2% inflation target. Jerome Powell says this will require a restrictive level of interest rates for an extended period of time. The view is that a higher rate is needed at the Fed. Therefore, it is possible that interest rate expectations will rise further after the upcoming Fed meeting. Economists say that in this case, gold will likely come under pressure. In addition, economists comment:
The same will happen if the dollar appreciates again. A preview of this came with a much more vibrant ISM Non-Production Index than expected. It caused the price of gold to drop by about $40.
“Gold will enjoy a deeper recovery”
Gold is hovering in a narrow range near $1,770. Gold needs a weekly close at $1,796 for more gains, according to Credit Suisse strategists. Strategists point out the following levels:
Gold remains limited to the critical 200DMA currently seen at $1,796. We expect a consolidation to emerge from here. This is below the $1,729 support, but with support seen at $1,698 at the next 55DMA, it is needed to dampen the spike in the range. Thus, a one-week close above $1,796 will open the door to a more meaningful recovery to $1,843 after the 50% drop in 2022, then to $1,877, the June high.
