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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
