(Kitco News) Gold’s January rally pushed prices to a nine-month high on Friday, with the precious metal up more than 5% year-to-date. But industry experts are not ruling out some consolidation ahead of the Federal Reserve’s February meeting.
Gold prices hit a nine-month high on Friday on bullish technical momentum and safe-haven buying. At the time of writing, February Comex gold futures were at $1,925.20 after paring some gains.
Is gold overbought?
Analysts describe gold’s rapid rally and warn that conditions are starting to look overdone.
“I am neutral on gold until the Fed meeting on February 1. The main resistance is at $2,000. But I would be surprised if we break above $1,950. We are likely to consolidate here until the Fed meeting.” Edward Moya, senior market analyst at OANDA, told Kitco News.
The overall outlook for gold is strongly bullish as many analysts look for the precious metal to reach $2,000 an ounce later this year and potentially later this quarter. It’s only the short-term view that seems potentially overstretched.
“It’s been a bullish move at a higher rate. $1,900 may not be a strong support level if selling pressure starts,” Moya noted.
Technically, gold is approaching overbought territory, RJO Futures chief market strategist Frank Cholly noted, adding that the higher trend remains strong.
“The gold market is going up at a ridiculous rate. It’s seeing higher highs, higher lows and higher closes. That’s good. And the US dollar is in a downtrend. Any correction at these levels would be a buying opportunity,” Cholly told Kitco News. “I expect gold to continue trending higher. I’m bullish until we see a retracement to $1,850.”
The $2,000 goal is still on the table for Cholly. “I see a clear path to $2,000, although we’re having a little trouble getting close to $1,950,” he said.
Cholly explained that gold is a unique market because higher prices make the asset more attractive. “In other markets, like commodities, which are supply and demand driven, you get to a point where high prices are the cure for high prices — meaning people stop buying at a certain price target or producers increase production. For gold, the higher it goes, the more people wants it. We can easily get to $2,000 in the first half of this year, if not sooner,” he added.
The start of the year saw recession fears and movement in Treasuries, which was good for gold. “Year-to-date, gold is off to a good start,” Moya said. “I still maintain my bullish outlook until 2023. We’ve seen it rally quite a bit, so there could be some weakness here.”
On February 1, all eyes will be on the Fed’s message, with markets pricing in a 25 basis point hike. This is a significant change of pace after the Fed hiked from 75 basis points in the fall to 50 basis points in December.
“The Fed has given enough messages. But the labor market is a little confusing. There is already enough weakness in the data. They are likely to go down to 25 basis points,” Moya said. “The big risk for the Fed is that inflation doesn’t come down completely.”
Cholly added that it is important to watch the US dollar’s movements over the next few weeks as markets expect a lower dollar as the Fed slows interest rate hikes.
Information next week
There are several critical data releases next week, including Q4 US GDP and the Fed’s favorite inflation measure – core personal consumption expenditures.
Despite worsening manufacturing and service sector data, fourth-quarter GDP is expected to show the US economy expanded 2.6%, following a 3.2% increase in the third quarter.
“Given the strong performance in October, consumer spending should be a significant driver, but beyond that, growth will be largely driven by net trade and inventory building,” said James Knightley, chief international economist at ING. “It’s not ‘good’ growth. Imports are falling because of a worsening domestic growth story, inventories are rising, partly because the supply chain is improving, but also because demand is not as strong as many businesses expected. The next few quarters will be weaker.”
The core PCE price index is expected to slow to 4.4% on an annual basis in December from 4.7% in November.
“[This] would confirm the downward trend in price pressures. There are no scheduled Federal Reserve speakers due to proximity to the upcoming FOMC meeting and a self-imposed “quiet period.” We expect a 25 bp rate hike on February 1,” Knightley added.
Wednesday: Bank of Canada rate decision
Thursday: US GDP Q4, US jobless claims, US durable goods orders
Friday: US PCE price index, US pending home sales
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