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The gold market will remain very sensitive to the Federal Reserve's rate outlook, so it is too premature to call a bullish rally in gold after prices gained more than $30 on the week, according to analysts.
Gold got a boost after June's U.S. inflation report showed price pressures rising at the slowest pace in two years. The U.S. CPI was up 3% last month from a year ago, while the core CPI, which excludes volatile food and energy prices, was at 4.8%, both below estimates.
The August Comex gold futures last traded at $1,961.70, up just over $30 on the week, after firmly holding the $1,900 an ounce level.
"The fact that gold held above $1,900 despite everyone expecting the Fed to hike interest rates in July is a vote of confidence," Gainesville Coins precious metals expert Everett Millman told Kitco News. "The Fed will drive the gold market for the next few months. And higher for longer rates would be negative for the price. Gold's current reaction means that either all rate hikes are not priced in yet or maybe markets' expectations do not match reality."
The Fed is still planning on hiking rates at least twice this year, with market expectations for the July meeting pricing in a 96% chance of a 25-basis-point increase. The second rate hike is yet to be priced in, which is why analysts remain cautious about gold in the short term.
"If anything, people want to go bullish on gold on any feeble pretext, including the hope that the Fed will go accommodative quickly and end the tightening program," TD Securities global head of commodity strategy Bart Melek told Kitco News. "At this point, it is too early to get overly bullish."
Even though the inflation narrative is starting to look better, it is not a done deal, especially considering the spike in energy prices. "We have recently seen a significant rise in oil prices as OPEC continues to reduce supply. The big benefit we received from cheaper energy may reverse to some extent in the months to come," Melek warned.
Plus, it is not likely that the Fed will be quick to change its hawkish rhetoric as it impacts its credibility going forward. "I doubt that the Fed starts easing us as quickly as the market thinks. Data could surprise to the upside, and the Fed sticks to its guns. And that could be a problem for gold," Melek noted.
What the Fed does next is still a big mystery, Millman said, noting that it is difficult to predict how some of the lagging effects of such aggressive monetary policy tightening will affect broader markets.
The key question for markets is not by how much the Fed is yet to hike, but for how long will the rates remain elevated before the Fed starts to cut, Millman added.
"If they turn around and cut rates at the end of this year or beginning of next year, markets will have a strong reaction," he said. "It is important to know what the next step is — how long rates will stay high and when is the rate cut coming. That's what's keeping gold in place."
Based on previous statements, the Fed is likely to err on the side of tightening, which would mean rates will remain higher for longer, Millman noted. With inflation being elevated for 18 months above 2%, Fed Chair Powell believes markets need time below 2% to balance that out.
Gold price levels to watch
Melek described the latest move in gold as likely short-lived, with short-covering driving prices higher. "That is going to reverse to a great extent. The rally is too premature, and there are significant risks of unwinding," he said.
The immediate resistance is at $1,966 and $1,970, and support is at $1,930, $1,900, and then $1,896 an ounce, Melek added.
Millman said he is also not ready to move into the bullish camp yet. He sees the next big resistance at $1,975-80 and support at $1,900.
Next week's data
Monday: NY Empire State Manufacturing index
Tuesday: U.S. retail sales, U.S. industrial production, Fed Vice Chair for Supervision Barr speaks
Wednesday: U.S. hosting starts and building permits
Thursday: U.S. jobless claims, Philly Fed manufacturing Index, U.S. existing home sales
By
Anna Golubova
For Kitco News
