(Kitco News) - The gold market may not be ready to break out to the upside as it encounters initial resistance at $4,200 an ounce, but there is still optimism among analysts as prices manage to hold support above $4,100 an ounce ahead of the weekend.
Analysts note that elevated bond yields and persistent inflation pressures continue to keep a lid on gold prices; however, they also add that investors continue to see value in the market as dips continue to be bought.
Spot gold last traded at $4,187.30 an ounce, up more than 1% from last Friday. Most of this week’s gains have come in the last two sessions, as prices quickly recovered after falling below $4,100 an ounce Wednesday.
Fawad Razaqzada, Market Analyst at FOREX.com, said that despite the risks, this week’s price action suggests that the market may have found its bottom.
“Gold investors are largely seeing through risks of tighter monetary policy because of concerns that inflation may again overshoot due to high oil prices,” he said. “Precious metals are proving their worth as a hedge against inflation, with fiat currencies continuing to lose value across the world due to persistent price pressures. This is reflected in gold-backed ETFs continuing to receive inflows during the recent price decline.”
Although gold has managed to withstand significant headwinds, analysts note that downside risks persist, particularly next week with the release of key inflation data.
Lukman Otunuga, Senior Market Analyst at FXTM, pointed out that while markets are not expecting the Federal Reserve to raise interest rates later this month, a rate hike is still on the table for December. He added that it would take significantly hotter inflation data next week to force the Federal Reserve to raise interest rates this month.
“Nevertheless, the medium-to-longer-term outlook still favours gold bears, with markets overwhelmingly pricing another Fed hike by December 2026,” he said. “In the week ahead, Wednesday's US CPI report could give bears fresh confidence if inflation proves sticky amid higher energy prices. The technical picture adds to the downside risk. Sustained weakness below $4,200 opens a path toward $4,100 and $4,000, while a breakout above it could see a sharp move toward the 100-day SMA near $4,260 and $4,300.”
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that he expects gold prices to remain range-bound next week. However, he added that he doesn’t see this as a negative for the market, describing this week’s recovery from below $4,100 as “encouraging.”
“Gold is likely to remain rangebound as the current macroeconomic challenges are seen by some as gold negative, which they ought to be, and those seeing the same challenges as a reason for adding length as seen through several weeks of ETF buying,” he said.
Looking beyond next week’s price action, Hansen said in a note published Thursday that he remains bullish on gold over the medium term, as he sees two factors helping investors look beyond elevated bond yields and the immediate rise in the opportunity cost of holding a non-interest-bearing asset.
“High borrowing costs eventually undermine economic activity, exposing weaknesses in heavily leveraged sectors. A slowdown or recession would likely trigger renewed demand for government bonds, lower real yields and eventually easier monetary policy, supporting gold,” he said. “In the second, growth proves more resilient, but elevated yields increasingly strain public finances. With government debt exceeding annual economic output in several major economies, rising debt-servicing costs could eventually force policymakers to intervene to stabilise bond markets. Such intervention, particularly if it undermines confidence in monetary discipline, could strengthen demand for gold as a store of value.”
Looking at gold’s technical outlook, some analysts have said that despite this week’s recovery, gold needs to see a sustained push back above $4,200 before investors jump back into the market.
David Morrison, Senior Market Analyst at Trade Nation, said that with gold trading below this critical level, momentum indicators continue to highlight elevated downside risks.
“The daily MACD has flattened out and is trying to curl up. That’s encouraging for the bulls. However, the MACD hasn’t pulled back to the oversold levels that existed when prices were consolidating back in July. That suggests that any upside momentum could quickly run out of steam, even faster than it did in August. So, yet again, it’s a good time to be cautious, especially as the US dollar, which was little changed and apparently consolidating this morning, still could be in bullish mode,” he said.
Along with elevated bond yields, analysts note that gold could struggle against the U.S. dollar next week, as weakness in the euro continues to bolster the greenback.
Adam Turnquist, Chief Cross-Asset Strategist at LPL Financial, said in a recent note that the U.S. Dollar Index has broken out above a double-bottom pattern and surpassed its June highs around 101.75 points. He added that in this environment, the dollar’s momentum remains bullish.
“Dollar strength raises the local-currency cost of commodities and increases the burden of servicing dollar-denominated debt,” he said. “Gold has historically struggled during periods of dollar strength. A stronger dollar makes gold more expensive for foreign buyers.”
He added that if the U.S. Dollar Index breaks above 102.86, he sees room for it to rise as high as 107 points.
Analysts have said that any economic data supporting further Federal Reserve monetary policy tightening will be bullish for the dollar. While the U.S. Consumer Price Index will be the featured report next week, analysts will also be keeping an eye on inflation data from the Producer Price Index.
Markets will also receive regional manufacturing data.
Economists also note that markets will be sensitive to comments from Federal Reserve Chair Kevin Warsh, who will participate in a fireside chat late Thursday evening Eastern time, at the Annual Meetings of the International Monetary Fund and World Bank Group in Bangkok. On Monday, U.S. and Canadian banks will be closed for Columbus Day and Thanksgiving Day, respectively; however, U.S. stock markets will remain open for trading.
Economic data to watch next week:
Tuesday: US Existing Home Sales
Wednesday: US CPI
Thursday: US PPI, US Retail Sales, US weekly jobless claims, Philly Fed manufacturing survey, New York Fed Empire State Survey, Federal Reserve Chair Warsh to Speak at IMF event
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