(Kitco News) – Gold prices spent the first week of 2024 solidly above $2000 per ounce, but they were yanked up and down as markets attempted to calibrate their expectations of how soon the Federal Reserve will cut rates based on economic data releases.
After trading sideways on Monday and Tuesday, gold sold off sharply following the publication of the minutes from December’s FOMC meeting on Wednesday afternoon, which seemed to indicate that the Fed was in no hurry to lower interest rates. Then, on Friday morning, a stronger-than-anticipated Nonfarm Payrolls report drove gold to session lows under $2,025 per ounce; 90 minutes later, a worse-than-expected ISM Services PMI pushed it to session highs above $2063.
The latest Kitco News Weekly Gold Survey shows exactly half of retail investors are expecting gains for gold next week, while a full two-thirds of market analysts are taking a bullish stance on the yellow metal’s near-term prospects.
James Stanley, senior market strategist at Forex.com, thinks gold prices are due for a pullback next week. “We’re at a major spot of longer-term resistance and while I don’t doubt that Gold can clear that at some point this year, I do question the timing of that happening right now with Core CPI expected to come in at 4%,” he said.
Adrian Day, President of Adrian Day Asset Management, has switched his near-term bias on gold prices to bullish. “The U.S. employment report was a surprise to the market, but gold has apparently shrugged it off,” he said. “The Federal Reserve will not be changing direction again, maybe just moving a little slower than the market had previously, somewhat optimistically, thought.”
Sean Lusk, co-director of commercial hedging at Walsh Trading, believes that today’s selloff after payrolls and runup after ISM were both about adjusting Fed rate cut expectations, but the simmering Middle East conflict is also supporting gold and silver prices.
“Should that continue, or we engage in somewhat of a broader war here, then all bets are off with everything,” Lusk said. “That’s going to rally energies, and the fear gauges, gold and silver, will probably get a continued shot in the arm with that. Seasonally, the path of least resistance is higher in those markets during the first part of the year, but we’ll see if that comes to fruition again.”
Lusk warned that there are no absolutes for anything anymore, especially with the Fed and Treasury contradicting one another.
“It’s just such a convoluted mess,” he said. “I don’t think [FOMC members] even know what the ramifications are if they do start cutting rates again, because that doesn’t tamp inflation, it enflames it. And there lies the problem. Because if they don’t, and they keep more of a hawkish view, then equities are going to come off some.”
“I think either way, gold is going to be favored here, because as rates were rising last year, gold backed off some, but you still finished the year on a high note and showed some really good gains. We were up almost 15% and finished $250 higher. Not bad.”
Lusk said that during this period of seasonal strength, between now and Valentine’s Day, he’s expecting gold to get to $2,175.
“We’ll see what the [CPI] numbers are next week, but I’m bullish.”
This week, nine Wall Street analysts participated in the Kitco News Gold Survey, and they were as bullish as they’ve been in some time. Six experts, or 66%, expected to see higher gold prices next week, while only one analyst, representing 11%, predicted a drop in price. The remaining two experts, or 22% of the total, were neutral on gold for the coming week.
Meanwhile, 301 votes were cast in Kitco’s online polls, with market participants more cautious than the experts for a change. 149 retail investors, representing 50%, looked for gold to rise next week. Another 79, or 26%, expected it would be lower, while 73 respondents, or 24%, were neutral on the near-term prospects for the precious metal.
The latest survey shows that retail investors expect gold prices to trade around $2,049 per ounce next week.
As traders and investors trickle back into the markets following the holidays, the biggest risk event for gold prices next week is the December CPI report, which will be released Thursday. If inflation continues to fall, it could once again spur market optimism about the timeframe for lower interest rates.
Markets will also receive the U.S. Balance of Trade for November on Tuesday, Wholesale Inventories for November and MBA Mortgage Applications on Wednesday, weekly jobless claims on Thursday, and U.S. PPI for December on Friday.
Adam Button, head of currency strategy at Forexlive.com, said seasonals and the latest employment data point towards higher gold prices, but the precious metal’s response to CPI will be key.
“Payrolls is a lagging indicator, while ISM Services is a leading indicator,” Button said. “Both are volatile, but if the ISM number is right, there is some weakness in the pipeline for the U.S. economy, and that’s going to encourage the Fed to cut rates.”
He cautioned that neither markets nor the Fed will have an accurate read on the next rate move just yet. “A lot of data between now and March 20th,” Button said. “But I think the question will increasingly be, does the Fed want to start to take out some insurance against the softening economy? There won’t be a clear picture by the time the March FOMC rolls around, but there may be enough evidence to start taking out insurance, take rates from five and a half down to five, and then see.”
Button said that by June or July, we may be getting very soft inflation numbers. “It all starts to look like maybe sub-two percent if commodities stay tame. And at that point, if you’re not taking out insurance, you’re going to look pretty foolish because you don’t want to have to start cutting by 50.”
“I think today, what I take away from the gold market is, it wants to see Fed cuts,” he said. “The gold market likes dovish data, hawkish data, gold sells, dovish data, gold goes up. And I think the gold trade from here is as simple as that.”
Button cautioned that for traders to continue believing in gold, it will need to catch a bid on low inflation data. “Basically, it hinges on CPI,” he said. “If CPI is soft, gold has to rally. If you get the soft data and it doesn’t rally on CPI, then that’s a red flag.”
“Everything is aligned for gold right now, but now it’s time to put up or shut up,” he said. “You’ve got to get through $2,100, or $2,080 really, on a monthly close for January. Otherwise, maybe it’s just not going to happen.”
“I can also see the dollar softening next week, so I’m definitely bullish for next week,” Button said. “And seasonals, they are what they are. I’m bullish all month on that. I think there’s a lot to like here.”
Marc Chandler, Managing Director at Bannockburn Global Forex, expects gold to trade sideways next week, and he’s looking to the CPI report for direction. “The focus shifts from jobs to inflation in the coming days,” he said. “The headlines about the US labor market looked stronger than the details. As the dollar unwound its initial gains, gold caught a bid and recovered from the $2025 area. A move above $2050 could retest $2075 but consolidation in the coming days may be the most likely scenario.”
Darin Newsom, Senior Market Analyst at Barchart.com, thinks gold is likely to post gains during the coming week. “Though the February futures contract’s short-term trend remains down, Friday could see it complete a bullish outside range,” said. “If so, this would indicate Feb gold could rally through the early part of next week, possibly testing the previous high of $2,098.20.”
“Giving the upside the benefit of the doubt for both silver and gold,” said Mark Leibovit, publisher of the VR Metals/Resource Letter.
And Kitco Senior Analyst Jim Wyckoff expects gold prices to continue trading in a range next week. “Sideways and choppy as the charts remain overall bullish, but rally in USDX and uptick on bond yields have the gold bulls timid,” Wyckoff said.
Spot gold is currently up 0.07% on the day but down 1.00% on the week, last trading at $2,045.02 per ounce at the time of writing.
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