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(Kitco News) – Investors and traders need to keep an eye on gold’s $2,000 an ounce level next week as the market navigates further volatility created by the Federal Reserve’s expected hawkish higher-for-longer monetary policy stance, according to some analysts.
According to the CME FedWatch Tool, markets see a nearly 100% chance that the Federal Reserve will leave interest rates unchanged between 5.25% and 5.50%. At the same time, the Federal Reserve is expected to maintain restrictive monetary policies for the foreseeable future.
Ole Hansen, head of commodity strategy at Saxo Bank, said that the Federal Reserve’s hawkish stance continues to keep investors away from buying gold-backed exchange-traded products, a critical segment of the market that is needed to support prices at current levels.
He said that unless gold prices can break $2,000 an ounce, he would expect to see some profit-taking and price consolidation next week.
“Gold trades within a very steep ascending channel, which highlights not only the current strength of the rally, but also the need for consolidation,” he said in a note Friday.”Earlier this week, the yellow metal did correct lower, only to find support at the first given opportunity just above $1950. A close above $2000 may signal a move towards the two record closing highs of around $2050 from March 2022, and May this year.”
However, he added that all bets are off if the Federal Reserve blinks in the face of rising bond yields.
Analysts note that despite a few lingering effects, the Federal Reserve’s monetary policies are having less of an impact on gold as geopolitical uncertainty and debt concerns support safe-haven demand in the near term.
The bullish outlook for gold comes as prices look to end the week in relatively neutral territory, holding most of the gains made in the last two weeks. December gold futures last traded at $1,990 an ounce, down only $4 from last week’s closing price.
Julia Cordova, founder of Cordovatrades.com, said that she could see gold prices consolidate next week if prices aren’t able to push above $2,000 an ounce.
Gold’s ability to hold its recent gains comes as 10-year bond yields remain within striking distance of 5% and the U.S. dollar index holds solid support above 106 points.
One of the biggest drivers for gold remains geopolitical instability as Israel’s ongoing war with Hamas continues to fuel tensions in the Middle East. It is still uncertain whether or when Israel’s Defence Force will send troops into Gaza.
“Such a scenario will be bad news for those who hoped for a de-escalation in the conflict,” said Ricardo Evangelista, Senior Analyst at ActivTrades. “Instead, the stakes are getting higher, and it is becoming more likely that third parties, such as Hezbollah and Iran, will get involved. Against this background, despite rising treasury yields and a strengthening US dollar, gold prices are rising as worried investors seek reassurance in the ultimate haven.”
At the same time, some analysts have said that gold has been able to withstand higher bond yields as investors start to focus on what could be an impending U.S.debt crisis.
Some analysts have said there is a growing threat that bond yields could become unanchored to the Fed’s monetary policy stance as investors demand higher premia due to the nation’s rising deficit, all while 10-year bond yields at 5% continue to push pressure on U.S. credit markets, choking off growth.
Edward Moya, senior North America market analyst at OANDA, said markets could be sensitive to next week’s quarterly refunding statement from the U.S. Treasury Department.
“Is the Treasury going to have to issue more bonds than expected in the fourth quarter?” he asked. “We don’t know where the demand will come from as more supply comes onto the market. There are catalysts here that could trigger major problems in the bond market that could be positive for gold.”
Although the Federal Reserve is expected to maintain a tight grip on interest rates, the committee could open itself to buying bonds to keep yields in line and provide liquidity for financial markets.
Moya said that yields probably aren’t high enough yet for this scenario, but it could be something investors are preparing for, and are buying gold in anticipation.
Although the Federal Reserve rate decision will be the main economic event next week, investors will also be paying attention to the monetary policy decisions of the Bank of England and the Bank of Japan.
It will also be an important week for the U.S. labor market, with the Friday release of October’s nonfarm payrolls report.
Next week’s data:
Monday: Bank of Japan monetary policy decision
Tuesday: U.S. consumer confidence
Wednesday: ADP non-farm payrolls; ISM manufacturing PMI, JOLTS job openings, Federal Reserve monetary policy decision
Thursday: Bank of England monetary policy decision
Friday: Nonfarm payrolls report, ISM services PMI
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
