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The growing inflation threat remains the most extensive support for the gold market as analysts see the potential for prices to test critical resistance around $1,830 in the near term.
Friday morning, gold prices pushed to a six-week high as rising inflation pressures have pushed breakeven rates in the five-year bonds to their highest level in a decade. The breakeven rate is the difference in yields between bonds and Treasury Inflation-Protected Securities (TIPS). The difference represents the inflation rate needed to equalize their returns.
However, gold lost some significant ground, falling $30 in a matter of minutes after Federal Reserve Chair Jerome Powell tried to talk down the rising inflation threat.
In an online conference hosted by the South African Reserve Bank, despite significant sound issues, Powell reiterated his outlook that the U.S. central bank is on track to reduce its monthly bond purchase before the end of the year. He added that the monthly purchases are expected to end by mid-2022.
However, not all analysts are convinced that Powell and the U.S. central bank will be able to resolve the growing inflation expectations.
Daniel Pavilonis, senior commodities broker with RJO Futures, said that the rise in yields could indicate that inflation expectations are becoming unanchored and with economic activity starting to slow, the Federal Reserve will have limited tools.
“I don't think the Federal Reserve has the ability to bring inflation back under control," he said. “We are seeing the risk of stagflation continue to grow and that will be good for gold and all commodities. Gold will do well as investors will see it as a value play."
Wade Guenther, managing partner at Wilshire Phoenix, said in a recent interview with Kitco News that he also doesn't see the Federal Reserve getting ahead of the inflation curve.
Guenther explained that inflation is currently being driven by the continued disruption of the global supply chain. He added that the supply crunch could last longer than is initially expected, which means inflation will remain elevated.
“There is nothing the Federal Reserve can do to fix the supply chain," he said. “This is not inflation driven by consumer demand."
Although he remained relatively positive on economic activity, Powell noted a growing risk that the supply-chain disruptions persist longer than expected, which could keep inflation high through 2022.
However, he added that the base case is for the supply bottlenecks to be resolved and for inflation to fall back to 2%.
Inflation is also a growing global problem. This past week Canadian data showed that consumer prices rose to their highest level in 13 years last month.
In Britain, inflation pressures remained elevated and above the Bank of England's target for a second consecutive month.
Gold looks good, but still faces a lot of competition
While inflation pressures continue to support gold prices, analysts note that the dynamic has changed slightly as the precious metal faces new competition, particularly from Bitcoin.
This past week, bitcoin prices rose to a new record high above $65,000 an ounce. The rally in the digital currency coincided with the launching of a new Bitcoin exchange-traded product (ETF). The ProShares Bitcoin Strategy ETF started trading Tuesday and tracks CME Bitcoin Futures.
Some analysts have noted that although the new Bitcoin ETF adds a new layer of legitimacy to the digital currency marketplace, it is not a significant gamechanger for gold.
“Yes, bitcoin has taken some momentum and capital away from the gold market, but gold is far from being obsolete," said Ole Hansen, head of commodity strategy at Saxo Bank. “Will every gold investors sell their gold to buy Bitcoin? No."
Hansen added that equity markets, which are trading near record highs, are also strong competition for gold. However, he said that momentum can quickly shift back to gold's favor if the precious metal can break above $1,835 an ounce.
U.S. dollar remains a headwind for gold
Along with Bitcoin and equity markets, analysts also say that they are still keeping an eye on the U.S. dollar. The U.S. dollar index has managed to hold critical support above 93.50 points.
David Madden, market analyst at Equiti Capital, said that while he sees room for gold prices to test resistance around $1,830, he doesn't expect that level to break.
He added that a significant risk event next week for gold and the U.S. dollar will be the European Central Bank's monetary policy meeting. The euro has lost some ground against both the British pound and the U.S. dollar; however, Madden said that the ECB probably likes this current environment and will be careful not to shift the current market sentiment.
He added that if President Christine Lagarde strikes a dovish tone and downplays the inflation outlook, that could weaken the euro against the U.S. dollar, which would be negative for gold.
Data to watch next week
While the ECB will be the main focus next week, the Bank of Canada and the Bank of Japan are also holding monetary policy meetings. The bank of Canada could be under pressure to tighten its monetary policies sooner than expected after inflation rose to a 13 year high in September.
The economic docket will also have some important U.S. data. Tuesday markets will receive U.S. consumer confidence data for October and new home sales numbers for September. Wednesday is the release of durable goods report that will gauge the health of the nation's manufacturing sector.
Thursday markets will receive the first reading of third-quarter U.S. GDP. Analysts have said that any miss in this report could be good for gold as it would raise further fears of the growing stagflation fears.
The week ends with the release of October inflation data and personal consumption and income numbers.
By Neils Christensen
For Kitco News
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