Fed Gamble: Gold’s Record Highs Face Two-Sided Risk as Main Street Stays Cautious

After last week's peaks and valleys brought gold prices right back to where they began, traders were treated to a good old-fashioned bull market rally this week. 

Spot gold kicked off the week trading at $2,496.91 and spent the evening session flirting with $2,500 per ounce before North American traders joined the party on Monday morning to push the yellow metal above it. Spoiler alert: After 1 p.m. EDT on Monday, prices never sniffed the 2400s again. 

Tuesday saw gold continuing to consolidate, with prices trading in a narrow $10 range during the North American session before catching a bid overnight to hit the then-weekly high of $2,527.77 per ounce. 

Wednesday morning brought the week’s first major economic data release, with U.S. CPI for August driving gold $20 lower to $2,504 per ounce, after which it spent the rest of the day grinding slowly and steadily higher.

But the release of U.S. PPI for August on Thursday morning turned out to be the week’s major catalyst for gold’s price action, along with other precious metals and most risk assets, with the yellow metal rocketing from $2,521 per ounce just before the 8:30 a.m. Eastern release to $2,548 just one hour later. 

From there, gold began a steep and steady climb that saw it set multiple new all-time highs throughout Thursday and Friday trading, with each shallow pullback followed by another decisive leg higher. 

Spot gold’s new all-time high of $2586.16 was set just before 1 p.m. on Friday afternoon, and the yellow metal held above $2,580 per ounce for the duration of Friday's trading session.

 

The latest Kitco News Weekly Gold Survey showed both industry experts and retail investors remain positive on balance about gold’s potential appreciation, but more doubtful and cautious than in recent weeks.

Marc Chandler, Managing Director at Bannockburn Global Forex, sees potential for higher prices, but also thinks gold is a little over its skis.

“Gold is at new record highs, seemingly helped by a decline in US rates and the dollar,” he said. “After it had calmed down, there is new speculation of a 50 bp cut next week by the Federal Reserve. Even if the Fed cuts 25 bp next week, it could be a dovish cut if the Fed Chair Powell does not push back against expectation of one and possibly two half-point cuts in the last two meetings of the year.”

Chandler added that with gold in uncharted waters, resistance has little meaning. “Psychologically, the $2600 attracts,” he said. “The momentum indicators are constructive, but the yellow metal is holding above its upper Bollinger Band (~$2552.50 ahead of the weekend).”

Mark Leibovit, publisher of the VR Metals/Resource Letter, expects gold prices to rise over the coming days, but he thinks they’ll reach their peak around the Fed meeting. “Looking for a trading top next week,” he said.

“Up,” said Darin Newsom, Senior Market Analyst at Barchart.com, “for a couple of reasons.”

“First, Newton’s First Law of Motion applied to markets tells us, ‘A trending market will remain in that trend until acted upon by an outside force,’ with that outside force usually noncommercial (fund, investment, etc.) activity,” he said. “As of Friday morning, investment money continues to flow into gold.”

“Second, to quote Willy Wonka (of the Chocolate Factory fame), ‘Yes! The danger must be growing for the rowers keep on rowing and they’re certainly not showing any signs that they are slowing!’ For this discussion, replace ‘rowers’ with ‘investors’ and ‘rowing’ with ‘buying’.”

Adam Button, head of currency strategy at Forexlive.com, also sees prices moving higher next week. “There is no reason to fight this momentum,” he said. “The Fed cutting only 25 bps might lead to some knee-jerk selling, but there will be buyers ahead of $2500.”

Daniel Pavilonis, senior commodities broker at RJO Futures, thinks gold is a little overextended in the near term, even if it still has significant tailwinds going into the end of the year.

“I think we're going to begin to plateau a little,” he said. “This is what the market was looking for, but we are so elevated away from all the moving averages, I think we start to get back to the realistic trend range.”

Pavilonis said that he expects gold to pull back ahead of the rate decision. “I think you'll see some profit taking,” he said. “I think it'll be within the range you've seen over the last couple weeks, maybe somewhere around there, and then waiting to see what the Fed does.”

“The perfect scenario I think is a [25 bps] cut,” he added. “I think if they start cutting at a half a point, we'll wonder ‘Are we cutting because we're starting to see deflation?’ I think a half a point is a little bit scary now. We have some major economic issues, and gold trading at $2,600 is pretty elevated.”

Pavilonis said the other major driver behind gold’s recent rise is the U.S. election and the potential for political unrest.

“I think the biggest driver of big rallies in gold is geopolitics,” he said. “Inflation's been a theme that's been ongoing for a while, maybe that's why, if you look at the averages, they're on an upward channel. But to get well above and beyond them, if you're looking at a weekly and you're looking at the 50-week moving average, we're so elevated from there, and still on an upward trend. If you have an election that can't be settled right away, or political fighting, another January 6th type of situation happens… I think that's in play. That's a pretty scary scenario.”

But for next week, Pavilonis said he’d be short gold coming out of the Fed meeting.

“I think it's on the board to sell the news,” Pavilonis said. “We're talking a half a point now, which is pretty incredible. I think that's almost a theory that they have to cut half a point, and if you get half a point, I'd be a seller.”

This week, 13 analysts participated in the Kitco News Gold Survey, and while the results showed optimism on balance, many expressed concerns that the yellow metal could move in either direction on both sides of the Fed decision. Still, eight experts, or 62%, expect to see gold prices rise during the week ahead, while another three analysts, or 23%, believe gold will trade lower next week. The two remaining experts, representing 15%, predicted sideways price action for the precious metal.

Meanwhile, 189 votes were cast in Kitco’s online poll, with the same proportion of Main Street investors optimistic as last week, but some of the sideways vote shifting into pessimistic territory. 107 retail traders, or 57%, looked for gold prices to rise next week, while 47, or 25%, expected the yellow metal to trade lower. The remaining 35 respondents, representing 18%, saw prices consolidating during the week ahead.

 

While the Federal Reserve’s interest rate decision on Wednesday will be the major focus for markets next week, they’re not the only central banks meeting, with the Bank of England and the Bank of Japan also set to announce their monetary policy decisions on Thursday.

Other key economic data include the Empire State Manufacturing Survey on Monday morning, U.S. Retail Sales on Tuesday, U.S. housing starts and building permits before the Fed announcement on Wednesday, and the Thursday release of U.S. weekly jobless claims, the Philly Fed Manufacturing Survey, and Existing Home Sales data.

James Stanley, senior market strategist at Forex.com, said he just can’t make the case for lower gold prices in the current environment.

“While I’d be hard-pressed to try to chase the move at these levels, I also have no evidence that it’s over yet,” Stanley said. “And getting bearish just because price is high seems a dangerous way to proceed at this point.”

“I am bullish on gold next week,” said Colin Cieszynski, Chief Market Strategist at SIA Wealth Management. “The only thing that would sink gold is theoretically, if the Fed only cuts a quarter point, you might get a bounce in the U.S. dollar, and if the Fed does not cut rates at all, which I doubt, gold would probably get smacked pretty good.”

“I'm starting to wonder if gold is pricing in 50 basis points,” he added. “That's my only concern.”

Everett Millman, Chief Market Analyst at Gainesville Coins, was also weighing the potential impacts of both likely Fed cut scenarios.

“I think there is certainly some potential for gold to pull back if the Fed only cuts 25 basis points,” he said. “I think the surge we're seeing right now is partly based off of the increasing odds of the bigger 50 basis point cut. Gold would certainly like that.”

“I don't think it's entirely priced in,” he added, “but 25 basis points, even though that should be good for gold, would be just a bit of a disappointment given that there's momentum building for a bigger cut.”

Millman said that beyond interest rates, there are a number of other things flying under the radar that are significantly supporting gold prices at these elevated levels.

“I think a lot of the positive momentum for gold is coming from greater cooperation between some of the BRICS nations on that currency that they're going to be discussing next month,” he said. “The de-dollarization narrative has been there for quite a while, but it may finally be entering more of the mainstream consciousness, at least on the fringes, that other countries around the world are turning to gold rather than the dollar. That momentum really seems like it's building.”

He added that while he believes gold is already pricing these things in, this doesn't preclude this rally from going higher.

“Once gold held above $2,500 and didn't swiftly correct back below that point, I became more confident that yes, we could easily see gold push significantly higher by the end of the year,” he said. “And that does seem to be playing out right now.”

Millman sees several factors coming together that could create a perfect storm for gold bulls.

“I think that October could be a pretty explosive month for gold if everything plays out,” he said. “With the acrimony of the election, the BRICS summit, the shift from bad seasonality in September to positive seasonality with some of the fall festivals in India. And I think we will see a resurgence of demand from the east starting in October.”

“Not to mention that as the Fed starts this rate cut cycle, even though it's being reported right now more as a ‘success over inflation’ story, I think it's more likely that any rate cut cycle from the Fed is a capitulation on the need to stimulate the economy,” he added. “We're going to potentially be entering a recession.”

“I think this is about as bullish as I've been on gold in a long time,” Millman said. “And that's especially interesting given that we're at all-time highs, and the knee-jerk reaction of anyone who's been in the gold market is that there tends to be the regression to the mean, especially to the downside. There are major corrections when gold prices get too high. The fact that's not happening right now is even more of a strong signal that we may be in just the early or middle stages of this secular bull market for gold.”

“I do expect to see some fireworks in October,” he said. 

Alex Kuptsikevich, senior market analyst at FxPro, characterized the latest move as “an acceleration of growth after a prolonged consolidation with an upward bias since April.”

Kuptsikevich said that gold had been trading in a rising bullish wedge, and it breached the upper boundary of it on Thursday. “Although gold has been gaining steadily, the extended consolidation at the end of last month removed excessive local overbought conditions, clearing the way for a rally, some of which we saw this week,” he said. “The realisation of this pattern indicates the possibility of a rise to the $2660 area, which is about $100 above current levels. A longer-term upside pattern to 161.8% of the initial two-year rise from August 2018, followed by a correction to 50% of that rise at the September 2022 lows, leads us to $2640.”

Kuptsikevich also noted the strong performance of gold against the euro. “From April to the end of August, the price bounced from the horizontal resistance on the approach to 2300 euros per ounce but overcame it with a sharp movement on Thursday,” he said. “The prolonged consolidation after the rally of March and April suggests that we are only seeing the beginning of a rally.”

“The decline in bond interest rates is returning some of the appeal of gold to retail investors,” he added. “From this perspective, it is worth being prepared that the expected Fed rate cut next week could reverse the trend. In 2015, we saw a similar situation, but in the other direction. Back then, gold fell for many months in anticipation of the first Fed rate hike, and the bottom was reached on the day of the hike.”

“It is possible that this time, too, the fact may trigger a long profit taking,” he warned, “especially if it turns out that the Fed is not ready to soften policy so actively in the coming months, as investors expect.”

Michael Moor, Founder of Moor Analytics, sees risks skewed largely to the upside. “I cautioned on 8/16/18 the break above $1,179.7-$1,183.7 warned of renewed strength. We have seen $1,417.3,” he wrote. “The solid trade above 21475-84 projects this upward $151 minimum, $954 (+) maximum. We have attained $452.6. The trade back above 25375 (-.6 tic per/hour) warns of renewed strength—we have seen $63.5. The trade above 25454 (-.5 of a tic per/hour) projects this upward $17 minimum, $55 (+) maximum—we have attained $55.6; but if we break back below decently, look for decent pressure.”

And Kitco Senior Analyst Jim Wyckoff sees no reason to doubt gold in the near term. “Higher as technicals and fundamentals are firmly bullish,” he said.

At the time of writing, spot gold last traded at $2,581.85 per ounce for a gain of 0.90% on the day and 3.40% on the week.

 

This article originally appeared on Kitco News.