Gold price faces big risk as markets zero in on next week’s inflation data

(Kitco News) The gold market remains at risk despite its sudden rebound above $1,700 an ounce this week. Analysts are pointing to next week’s inflation data as the deciding factor between bearish and bullish sentiment heading into the year.

After posting six straight months of losses between April and September, gold started the fourth quarter on a strong note. Comex December gold futures were last at $1,711.60, up 2.4% on the week.

The precious metal rose on rising risks in financial markets and a potential economic slowdown. The negative news increased bets on the Federal Reserve pivot from its aggressive tightening cycle.

“Some big risk events on the horizon have helped gold rally. The UK has a week to go before its bond purchase deadline and may have to announce measures over the weekend. The Bank of Japan had to step in to support the Japanese yen. And we’re likely to see more contingency action from central banks, indicating global market risks are heightened,” Edward Moya, senior market analyst at OANDA, told Kitco News. “That’s why you’ve made a lot of bets in support of an imminent Fed pivot.”

But not all macro data agreed with this view. Friday’s September employment report reconfirmed that the employment situation is still strong, with the unemployment rate falling to 3.5%. And according to analysts, this is not a level that the Fed would rush to change policy.

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“The report suggests that the effects of tighter monetary policy have yet to be felt,” Everett Millman, precious metals expert at Gainesville Coins, told Kitco News.

According to the CME FedWatch tool, markets are pricing in a 78 percent chance of another 75 basis point hike at the November meeting. This would be the fourth consecutive increase of this magnitude.

“Price pressure is not going away fast enough. The Fed will remain very dovish with its hawkish rhetoric and this is a difficult environment for Gold Moja.

Analysts are warning that this week’s gold rally could reverse if rate hike expectations rise.

“This could be a short-lived rally in part because a large part of the rationale for holding gold is that the Fed could reverse and slow rate hikes. The basic premise is that we’re already seeing other central banks do the rounds. But other central banks will pivot faster than the Fed. The Fed is unlikely to topple quickly as it will damage its credibility,” Millman said.

Employment is a lagging indicator

As markets continue to digest the latest macro data, it’s important to remember that employment is a lagging indicator.

“It takes between nine and 18 months for rate hike changes to seep through the economy. As inflation cools, the justification for more rate hikes before they come into effect raises the possibility that the Fed will rush itself,” Millman noted. “The Fed may have been more concerned about fighting inflation than warranted. For gold, this means some serious short-term weaknesses. But late this year or early next year, gold could see an explosive rise in gold prices if the impact of high interest rates trickles through.”

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Some drivers supporting gold in the meantime are geopolitical tensions, including the war in Ukraine, the rising nuclear threat and the energy crisis.

Seasonal dynamics are also working in gold’s favour. “We have entered festival season in India, followed by wedding season. Turkey and China have seen a big increase in gold imports,” Millman pointed out.

Next week is all about inflation

The September CPI report, due out on Thursday, is the main event markets will be watching next week. Any cooldown will boost bets around a Fed pivot and help gold rally. At the same time, a hotter than expected report could herald another sell-off in the precious metal.

“The market is seeing actual demand destruction as the rate hikes work themselves through the system,” Moya said. “There’s still a healthy amount of bets anticipating a Fed pivot. if [inflaiton is] same or hotter, gold could run into trouble in the near term. But this will likely be the last 75 basis point hike by the Fed. After November, the Federal Reserve will try to downgrade.”

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According to market consensus, US full-year inflation will come in at 8.1% in September after accelerating 8.3% in August. Annual core inflation is expected to rise to 6.5% from 6.3%.

“The headline rate will be weighed down by the lagged impact of the drop in fuel prices, which will also likely be reflected in lower air fares to some extent. However, the core component (excluding food and energy) is expected to continue rising at a rapid pace,” said ING Chief Economist James Knightley.

Next week’s data

Wednesday: US PPI

Thursday: US CPI, Initial Jobless Claims

Friday: US Retail Sales, Michigan Consumer Sentiment

Disclaimer: The views expressed in this article are those of the author and may not reflect those of the author Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not an invitation to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article assume no responsibility for any loss and/or damage resulting from the use of this publication.

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