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Rising inflation pressures have taken their toll on the gold market. While a lot has been thrown at the precious metal, it continues to hold critical support, at least for now, according to some analysts.
Although gold is ending its second week in negative territory, it is entering the weekend well off its lows after holding critical support at $2,000 an ounce. April gold futures last traded at $2,025.60 an ounce, down 0.64% from last Friday.
Analysts note that gold has struggled as hotter-than-expected consumer and producer prices force investors to push back the start of the Federal Reserve's easing cycle. Markets see only a 10% chance of a March rate cut; at the same time, the CME FedWatch Tool shows markets see only a 33% chance of a move in May. However, there are still solid expectations that the U.S. central bank could start easing interest rates in June.
Ole Hansen, head of commodity strategy at Saxo Bank, said that although gold could see further selling pressure in the near term, he remains bullish in the long term.
"We have highlighted on several occasions in recent months that both [gold and silver] are likely to remain stuck until we get a better understanding about the delivery of future U.S. rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction," he said.
However, Hansen added that despite the risks of lower prices, robust physical demand in Asia should continue to provide support for gold until investors come in to drive prices higher.
"Gold will likely struggle in the short term as rate cut expectations are being dialed back. But overall, I look forward to seeing how Chinese investors respond to slightly lower prices next week. I believe the physical demand from central banks and retail investors, not least in China, will continue to provide a soft floor under the market," he added.
Barbara Lambrecht, commodity analyst at Commerzbank, said that she is not expecting to see much movement in gold in the near term as the market remains caught in a tug-of-war between investors looking for the Fed to cut rates and others expecting higher for longer.
"As the market is already very cautious with regard to key interest rates, the potential for further corrections is likely to be rather small. After all, key interest rate cuts are still expected this year," she said.
Markets will be closed on Monday in recognition of Presidents' Day. With markets balancing on a knife's edge, analysts have said that investors will be paying close attention to the minutes of the Federal Reserve's January monetary policy meeting. Gold could be sensitive to any comments regarding the timing of the central bank's first rate cut.
Silver is the metal to watch
Julia Cordova, Founder of CordovaTrades and author of the weekly newsletter The MoneyMaker, said she sees more potential in silver.
"Silver looks to have been basing," she said. "Silver will dramatically outperform gold to the upside next week."
Michele Schneider, director of trading education and research at MarketGauge, said she is also paying more attention to silver and is completely neutral on gold.
"I am pretty much ignoring gold until prices fall to $1,920 or break above $2,100 an ounce," she said.
Schneider said that silver, because of its robust industrial demand, is in a perfect position to benefit from rising inflation.
"We're heading into an inflation that the Fed is not necessarily ready for or possibly able to control without killing gold," she said. Nobody's going to fly to silver as a safety flight unless they're worried about inflation. Right now, we just might need to be concerned about inflation."
The bullish calls on silver come as prices have managed to hold critical support at $22 an ounce and are ending the week testing initial resistance at $23.50 an ounce. The silver price is ending the week up 7% from its lows.
Economic data for the week
Wednesday: FOMC meeting minutes
Thursday: Flash US PMI, Weekly jobless claims, U.S. existing home sales
Kitco Media
Neils Christensen
