(Kitco News) The gold market remains at risk despite its sudden recovery above $1,700 an ounce this week. Analysts point to next week’s inflation data as the deciding factor between bearish and bullish sentiment going into the year-end.
After posting six months of consecutive losses between April and September, gold has kicked off the fourth quarter on a strong note. December Comex gold futures were last at $1,711.60, up 2.4% on the week.
The precious metal climbed on rising risks in the financial markets and a potential slowdown in the economy. The negative news increased bets for the Federal Reserve pivot from its aggressive tightening cycle.
“Some big risk events on the horizon helped gold recover. The UK if facing the deadline on its bond purchases in a week, and they might have to announce measures over the weekend. The Bank of Japan had to intervene to support the Japanese yen. And we are likely to see more emergency action from central banks, which suggests global market risks are elevated,” OANDA senior market analyst Edward Moya told Kitco News. “That’s why you had a lot of bets building in support of a Fed pivot sometime soon.”
But not all macro data cooperated with that view. Friday’s September jobs report once again confirmed that the employment situation is still strong, with the unemployment rate dropping to 3.5%. And according to analysts, that’s not a level the Fed would be rushing to change its policy.
“The report suggests that the effects of tighter monetary policy haven’t played out yet,” Gainesville Coins precious metals expert Everett Millman told Kitco News.
Markets are pricing in a 78% chance of another 75-basis-point hike at the November meeting, according to the CME FedWatch Tool. This would make the fourth consecutive hike of such magnitude.
“The decline in pricing pressures is not happening fast enough. The Fed is going to remain very aggressive with its hawkish rhetoric, and that is a difficult environment for gold. We are going to see gold vulnerable to a bit more downside here,” said Moya.
Analysts are warning that this week’s gold rally could reverse if rate hike expectations climb.
“This could be a short-lived rally partly because a lot of the investment rationale for holding gold right is that the Fed could pivot and slow down rate hikes. The baseline assumption is that we’ve already seen other central banks pivot. But other central banks will be quicker to pivot than the Fed. The US central bank is unlikely to flip-flop quickly as that will hurt its credibility,” Millman said.
Employment is a lagging indicator
As markets continue to digest the latest macro data, it is important to keep in mind that employment is a lagging indicator.
“Changes to rate hikes take between nine and 18 months to filter through the economy. If inflation starts to cool off, the justification for further rate hikes before they take effect does raise the possibility that the Fed is getting ahead of itself,” Millman noted . “The Fed was perhaps more worried about appearing to tackle inflation than was warranted. For gold, this means some serious weaknesses in the short term. But at the end of this year or beginning of next year, there could be an explosive rise in the gold price if the effects of high rates filter through.”
Some drivers supporting gold in the meantime are geopolitical tensions, including the war in Ukraine, the rising nuclear threat, and the energy crisis.
Also, the seasonal dynamic is working in favor of gold. “We entered the festival season in India, followed by the wedding season. In Turkey and China, there has been a big rise in gold imports,” Millman pointed out.
It’s all about inflation next week
The September CPI report, which will be released Thursday, is the main event markets are watching next week. Any cooling will boost bets around a Fed pivot and help gold rise. At the same time, a hotter-than-expected report could spell out another selloff for the precious metal.
“The market is seeing some actual demand destruction as rate hikes work themselves through the system,” Moya said. “There is still a healthy amount of bets anticipating a Fed pivot. If [inflaiton is] in line or hotter, gold could be in short-term trouble. But this will likely be the last 75bps increase from the Fed. After November, the US central bank will be looking to downshift.”
Market consensus calls expect US annual September inflation to come in at 8.1% after accelerating at an 8.3% pace in August. Core annual inflation is estimated to climb to 6.5% from 6.3%.
“The headline rate will be depressed by the lagged effects of the fall in gasoline prices, which is also likely to translate into lower airline fares to some extent. However, the core (ex-food and energy) component is set to continue rising at a rapid pace,” said ING chief international economist James Knightley.
Next week’s date
Wednesday: US PPI
Thursday: US CPI, initial jobless claims
Friday: US retail sales, Michigan consumer sentiment
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