By Barani Krishnan
Investing.com — Gold has clung to the high $1,700s despite the threat of a U.S. rate hike getting increasingly closer.
But with long-time dovish Fed boss Jerome Powell expected to issue some of his most hawkish assessments ever of the economy in the coming days, one wonders where the yellow metal will be a week from today.
At Friday’s settlement, U.S. gold futures’ most active contract, February, was up $8.10, or 0.5%, at $1,784.80 an ounce. For the week, it rose 0.1%.
News of rate hikes are almost always bad for gold. This time though, traders in bullion appear focused on the U.S. inflation story, allowing gold to play its traditional role as a hedge against that, although strong Fed action to right the situation could still be negative for the yellow metal.
The U.S. Consumer Price Index, or CPI, rose 6.8% in the year to November, growing at its fastest pace in four decades just as it did in October, the Labor Department announced on Friday.
“Gold is slowly getting its mojo back after a hot inflation report mostly matched estimates,” said Ed Moya of online trading platform OANDA. “A lot of the inflation is stickier than anyone wants and that should keep gold’s medium- and- long-term outlooks bullish.”
But Moya also cautioned that an accelerated rate hiking cycle is a big risk and could trigger panic selling in gold, though there does seem to be a high chance of the Fed doing that now.
“Gold just needs to survive a firm consensus on how many rate hikes the Fed will start off with next year,” he said. “Gold’s recent trading range of $1,760 and $1,800 might continue to hold up leading into next week’s FOMC decision.”
Gold’s pendulum will, of course, be decided by the swings in U.S. Treasuries and the dollar.
The benchmark 10-year Treasury note peaked at 1.53% for the just-ended week from last week’s 1.34% low, moving to the drumbeat of an impending rate hike.
The Dollar Index surprisingly flattened after Friday’s reading of consumer prices came in line with expectations.
“I’d characterize the CPI reading as right on expectations but the Forex market had positioned for a higher reading,” Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets, was quoted saying by Reuters.
Anderson said it was normal for forex players to scale back positions toward the year-end and Friday’s retreat in the dollar was “probably a prelude to that”.
“The FX market has been extremely long U.S. dollars for several months, so with this number coming in benign we’re almost out of events that could push the dollar materially higher before year-end.”
That leaves the Tuesday-Wednesday Federal Open Market Committee meeting of the Fed and Powell’s press conference thereafter as the final dollar/gold catalysts of the year.
Expectations are heavy that Powell will side this time with colleagues at the central bank who want to hurry along the taper of the Fed’s “forever-running” stimulus by possibly cutting $30 billion a month instead of the previously-stated $15 billion, so that the whole thing can be wrapped up in a little over three months, and the first pandemic-era rate hike can be held by April.
The argument for this is not just a CPI reading running at its hottest since 1982. It’s also a labor market with the lowest number of jobless claims in 52 years and standing just 0.2% from the Fed’s target for maximum employment as of November. If these aren’t compelling reasons for monetary tightening, one has to wonder what will be.
On Powell’s end, his transformation from dove to hawk was almost complete when he told the senate at the end of last month that it was time to stop calling the runaway US inflation as transitory. He also warned that “the threat of persistently higher inflation has grown” due to the emergence of the Omicron variant, and that surging price pressures could last “well into next year.”
Even so, the Fed chair conceded that Omicron poses further “downside risks to employment and economic activity”.
With such a complicated outlook, will the Fed push for doubling of its taper?
Powell will tell us on Wednesday.
Gold Technical Outlook
Sunil Kumar Dixit, a regular contributor of commodity technicals to Investing.com, says gold needs to stay above $1,768 in the coming week to avoid plunging into the lower $1,700s or even below.
“A decisive break below $1,768 can push gold down to 1758, which is the trigger for a correction to $1,745-$1,735 and $1,720,” said Dixit, who is chief technical strategist at skcharting.com.
Dixit noted that bullion’s spot price spent the week in the $1,793-$1,770 band, while sitting inside the previous week’s bearish candle.
In his view, bullion closed the week with “indecision”, at $1,782.75 while the weekly stochastic reading for Relative Strength Index, or RSI, stayed bearish at 23/43.
“Further moves will largely depend on prices breaking out of the two trend keys – the 50%-Fibonacci level of $1,797 and the 61.8%-Fibonacci level of $1,768.
But gold could also surprise and move higher, Dixit said.
“A volume-supported move above $1,797 may trigger a run-up to the next major leg of $1,825,” he said.
Oil Market Activity & Price Roundup
Oil prices posted their first weekly gain after six in the red, with analysts warning of more volatility as the market tries to manage downward pressure from Omicron-related news and rate hike fears amid optimism about energy use in the coming quarter.
U.S. West Texas Intermediate crude, the benchmark for U.S. crude, settled up 73 cents, or 1%, at $71.67 a barrel. For the week, WTI gained 8.1%. Last week, it hit a four-month low of $62.48 on Omicron-related fears, after a seven-year high of $85.41 in mid October.
London-traded Brent, the global benchmark for oil, also settled up 73 cents on the day like WTI, gaining almost 1%, to settle at $75.15. For the week, Brent showed a gain of 7.7%. Last week, it fell to $65.80, from a 2014 high of $86.70 in mid-October.
“Omicron is still a major risk factor,” Phil Flynn, analyst at Chicago’s Price Futures Group and an avowed oil bull, said as crude prices showed a gain of around 7% on the week after losing some 20% over six previous weeks.
On the same note, Flynn pointed to a Bloomberg story that passenger vehicle traffic levels on U.S. interstate highways were back to pre-Covid levels, with miles driven up 0.3% on a four-week rolling average, the first positive rate since March 2020. “Omicron may – or may not – change the trend,” Flynn said, referring to a quote in that story.
Almost 80% of the 40-odd Omicron cases reported in the United States were among the fully vaccinated, with a third of them even having received a booster dose, the U.S. Centers for Disease Control and Prevention said on Thursday, further complicating efforts to counter the latest Covid variant.
Global health experts, including top U.S. virologist and White House adviser Dr. Anthony Fauci, say the effects of Omicron appeared to be less severe than initially thought. Pfizer (NYSE:PFE) and its partner BioNTech (NASDAQ:BNTX) have also said three doses of their vaccine could neutralize the variant.
But news on Thursday also showed Omicron was 4.2 times more transmissible than Covid’s Delta variant, which led to a resurgence in hospitalization and deaths around the world. What’s not known is the fatality rate of the new strain, though its spread rate was enough to stoke fear.
WTI Technical Outlook
Dixit notes that after six weeks of free-fall, WTI had taken support at $62.40, a level that has acted as a hard floor since March 2021 on multiple price swings.
U.S. crude’s weekly stochastic RSI reading of 29/21 with a bullish crossover hints at a continuation of upside, while a sustained move above the weekly middle Bollinger Band of $73.90 can be supportive for a further recovery in prices, he said.
“This also coincides with the 50%-Fibonacci retracement measured from the $85.40 high to $62.40 low,” said Dixit.
“Volume-driven buying above this zone can further extend recovery to $76.60 and $80.”
On the flip side, failure to break above $73.90 could push WTI down to its 50-week Exponential Moving Average of $67.30 and retest the $62.40 low, he cautioned.
Disclaimer: Barani Krishnan does not hold a position in the commodities and securities he writes about.