(Kitco News) - The Federal Reserve is in no hurry to shift its current higher-for-longer monetary policy stance, which has significantly weakened bullish momentum in the gold market, and according to some analysts, it will take a big miss in inflation to push the precious metal one way or another out of its current trading channel.
Analysts note that gold is caught in a tight trading range as the Federal Reserve lays the groundwork for eventual rate cuts but pushes back on the start of the easing cycle. Markets now see the Fed easing rates in May.
The gold market is holding support well above $2,000 an ounce but is unable to break resistance above $2,050 an ounce. April gold futures last traded at $2,038.90 an ounce, down 0.75% from last week.
“The market is in a wait-and-see mode with a focus on incoming US data,” said Ole Hansen, head of commodity strategy at Saxo Bank. “A weak CPI next week would support prices but may not be enough, simply because traders/investors now want to see clear signs of a cut before committing.”
Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said that it is clear the gold market has run out of bullish momentum. He added that weaker inflation data could push gold prices back to $2,050 an ounce, but he doesn’t see a breakout anytime soon.
“We do not think that there will be a dramatic shift in that number, but anything that indicates that the situation is still very much under control would be sufficient to push the prices back above the 2050 price mark. But for now, it seems like there is more of a grind to the downside, with support being near the 2K price mark,” he said.
Although gold isn’t too much as it consolidates, Phillip Streible, chief market strategist at Blue Line Futures, said the market is coiling for a bigger breakout move.
“Gold right now is an alligator laying in the water just waiting for its prey,” he said.
James Stanley, senior market strategist at Forex.com, said he also sees gold coiling in its current consolidation pattern.
Although he is bullish on gold, he said he would like to see prices drop below $2,000 an ounce to attract new investors, igniting a run back to new all-time highs.
However, he added that he also sees a scenario where gold doesn’t correct as the Federal Reserve starts to cut interest rates, weakening the U.S. dollar.
Although the Federal Reserve has pushed back expectations for aggressive rate cuts, Stanley said they are striking a dovish tone as they look to support the economy and equity markets.
He noted that inflation, while it has come down from its June 2022 highs, still remains well above the 2% target; at the same time, the U.S. economy continues to see full employment levels, with the unemployment rate hovering below 4%.
“This is not an environment where the Fed should be looking at cutting interest rates, but they are all saying that rates will be coming down this year. That is keeping the U.S. dollar in check and keeping gold prices above $2,000 an ounce. While a correction for gold would be positive, you can’t ignore the market’s uptrend. It’s up to the bulls to run this market until it fails.”
Gold could be impacted by equity markets
Along with supporting the gold market, The S&P 500 aims to end the week at a record high above 5,000 points as it anticipates lower interest rates.
Christopher Vecchio, Head of Futures & Forex at Tastylive.com, said that he expects gold as a non-yielding asset to continue to tread water above $2,000 an ounce as investors focus on gains in equities.
“I think gold, right now, has a reason to stay somewhat elevated, but I think people should be cautious about seeing gold as something that's guaranteed to go up just because the Fed is cutting rates,” he said. “Right now, in this Goldilocks kind of world, we're getting our cake and eating it too. Inflation's low, the labor market's still healthy, and the economy is booming. That's not really the appropriate environment for people looking [to go] long gold.”
Vecchio noted that volatility in the silver market is near its lowest point in the past year. At the same time, prices remain below $23 an ounce.
“Silver, like gold, typically has a positive correlation with volatility, so I have started testing the market with a small long position against the June lows,” he said. “I think strategically, given the odds of where we stand right now. It's worth taking a very small, long position at these prices.”
Although investors will be focused on the Consumer Price Index data next week, markets will receive a full docket of economic reports, including retail sales, regional manufacturing data, and housing construction numbers.
Economic Data for the Week
Tuesday: Consumer Price Index
Thursday: U.S. retail sales, Empire State Survey, Philly Fed Survey, Weekly jobless claims
Friday: U.S. PPI, U.S. Housing starts and building permits, Preliminary UofM consumer sentiment