The gold market closed the week down nearly $90 from October highs as investors renewed expectations of a very aggressive Federal Reserve by the end of the year. Analysts are not very optimistic about the outlook for gold.
“This is getting dangerous for gold”
cryptocoin.com 10-year US Treasury yields climbed over 4% on Friday. The US dollar index (DXY) is nearing 20-year highs after this week’s macro data reinforced the Fed’s view of more rate hikes rather than a pivot. By contrast, gold slumped below the $1,650 level. December Comex gold futures closed the week down 1.74% at $1,647.80. Edward Moya, senior market analyst at OANDA, comments:
This is starting to become dangerous for gold. The market is not showing relief from the strength of the dollar. What makes this so difficult is that the Japanese yen sees the Asian crisis and the British pound lower as the market deals with financial stability risks.
“This case will be a game changer for its gold look”
Meanwhile, from a policy standpoint, US officials are unlikely to intervene anytime soon. This allows the dollar rally to continue. This week, US Treasury Secretary Janet Yellen endorsed the dollar rally. Therefore, the yellow metal remains in a dangerous state for now. Edward Moya makes the following statement on the subject:
We are looking at an environment where the dollar will give up its safe-haven flows and Fed rate hike expectations. Making matters worse is the changing Fed outlook. Inflation is proving to be more sticky. Markets will gradually increase the Fed’s rate hike expectations. And that’s a game changer for the gold look on my part.
“This is not good news for yellow metal”
According to the CME FedWatch Tool, the probability of a 75 bps increase is 99.7% in November. It also gives a 74% chance of a 50 bps increase in December. There is also the possibility of a series of smaller rate hikes, possibly in February and March.
Edward Moya says that within a week, the market moved from pricing 125bp gains before peaking to now seeking 175bp gains. So this is not good news for non-interest bearing gold, he says.
“Fed’s aggressive actions will create more volatility for gold”
Bart Melek, head of global commodities strategy at TD Securities, confirms that the more aggressive actions of the Fed will create more volatility for gold in the foreseeable future. CPI data on Thursday showed that inflation continued to be above expectations. It also revealed that core inflation continues to rise. Melek continues her explanation as follows:
Therefore, the Fed will have to give the impression that it is willing to do whatever it takes to control inflation. Looking at the forward curve, the market is pricing almost 5% through March.
“Gold will not recover from these aggressive moves”
Frank Cholly, senior market strategist at RJO Futures, warns that the message from the Fed will not allow gold to continue any rally it has achieved. And the failure of gold to climb above $1,740 last week is another downside sign for future price action. Cholly explains his views as follows:
The Fed has room for larger rate hikes. Gold will not be able to recover in the face of these aggressive moves. Whether we can get the $1,600 or not is an important event. We are likely to retest September lows.
Support levels to watch
Bart Melek says the next level of support for gold is $1,615. He records that it is followed by $1,580. Resistance is held around $1,700, $1,707, and $1,711. Gold hasn’t spent much time below $1,600 since 2019. This has some analysts worried that if gold falls below this level, it will fall harder. Edward Moya makes the following statement on this subject:
If we break $1,620 it will likely take us to $1,600. If we drop below $1,600 and it’s down to a catalyst, there aren’t many people who would argue that. It is possible that we may see one last big move to shake up the positions. There have not been many tests of support levels below $1,600 since 2019. We’d probably go for $1,565.
Edward Moya says any negative macro news next week could work in gold’s favor. He adds that this marks the first level of resistance at $1,675. Moya opens the topic like this:
If we continue to be pessimistic about the Fed’s regional surveys and the housing market shows signs of further cooling, this will support the argument that we are close to right pricing on how far the Fed can go with tightening. We also need to see companies announcing more layoffs, like Beyond Meat did. Bad news, good news for gold.
Next week’s macro data
- Monday: NY Empire State Manufacturing Index
- Tuesday: US Industrial Production
- Wednesday: US Building Permits, Housing Starts
- Thursday: US Initial Jobless Claims, Philadelphia Fed Manufacturing Index, US Existing Home Sales
