Gold rises to 6-month high on mixed US data, focus on inflation next week

(Kitco News) The latest macro data out of the US sent gold to a six-month high after the US economy and employment showed signs of cooling.

The gold market was just $25 away from $1,900/oz on Friday, with February Comex gold up 2.4% for the week at $1,873.40.

The biggest macro event of the week showed that US job growth slowed modestly in December, with US non-farm payrolls increasing by 223,000 last month. November data has been revised to add 256,000 positions.

One gold-positive driver of the report was lower wage pressures, a sign that inflation is cooling. Annual average hourly earnings rose 4.6% last month. That was below markets’ expectations of 5% and followed November’s downwardly revised gain of 4.8%.

“In general [the report] showed that the economy is slowing down, with inflation falling and the labor market still strong. There is simply nothing bearish about this report, but it was also a mixed report with something for everyone,” said Nicky Shiels, head of metals strategy at MKS PAMP.

Also, the US services sector contracted in December for the first time in 30 months, and the Services Purchasing Managers’ Index (PMI) read 49.6%. A 6.9 percentage point drop surprised to the downside as market consensus calls for the index to come in at 55%.

“Although the latest tracking shows GDP growth was better than expected in the fourth quarter of last year, this decline in ISM services will raise concerns that the economy is rapidly losing momentum and could have a soft start to 2023,” said Andrew Grantham, chief economist at CIBC Capital Markets.

Gold rose in response to both data releases, hitting a daily high of $1,875.20 – its highest level since June. “Gold is on its knees,” Shiels said. “If business activity and sharp declines in orders continue, it raises concerns about the outlook for demand.”

Next week’s performance is key

Shiels added that what gold does next will be vital to determine whether the precious metal can continue its rally.

“Depending on whether gold can hold on to its weekly gains (which is increasingly likely), it reinforces the offensive way in which gold has been trading since early November when it established a mild bull trend – always looking for reasons to rally,” he said. “There is a decent amount of bullish demand that has pulled back from last year and could be ignited at the right data point (CPI & PCE),” Shiels said.

Gold has started to show signs of a bullish pattern with expectations of a turnaround by the Federal Reserve in the fourth quarter of 2022.

Bannockburn Global Forex managing director Marc Chandler told Kitco News that the next target for gold to cross is around $1,896.50, a 61.8% retracement of losses since last March’s peak near $2,070.

“I’m not sure the momentum indicators are stretched because the risk is more than 1 in 3 that Fed funds futures will price in a 50 bp hike at the FOMC meeting, which ends on February 1,” Chandler said. “That said, as long as the yellow metal remains above the $1,825-$1,830 area, the upside appears to be favored.”

After Friday’s data, markets began pricing in a 74.2% chance of a 25-basis-point rate hike in February, according to CME’s FedWatch Tool.

Commerzbank analyst Barbara Lambrecht said gold had been anticipating a slowdown in Fed rate hikes, but ETF investors still need some convincing to really get the rally started.

“Its rise is primarily due to greater optimism among speculative finance investors, who are generally more volatile,” Lambrecht wrote on Friday. “However, any sustained recovery in gold prices will first of all require a change in sentiment among ETF investors who are still cautious. They appear to be waiting for the end of the US rate hike period. We foresee a downside risk to the gold market in the short term.” .

Data to view

Inflation is one of the key reports gold will focus on next week, especially after minutes from the Fed’s December meeting showed that US central bank officials feel more needs to be done to combat price pressures.

“Federal Reserve officials are concerned that policy will need to be more restrictive and remain restrictive for a long time to ensure that demand balances with the economy’s supply and price pressures ease,” said James Knightley, chief international economist at ING.

Market consensus calls for the annual inflation figure to slow to 6.5% in December from a 7.1% print in November.

Tuesday: Fed Chairman Jerome Powell speaks on “Central Bank Independence”.

Thursday: CPI, US unemployment claims

Friday: Michigan consumer sentiment

Disclaimer: The views expressed in this article are those of the author and may not reflect his views 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 a requirement to make any exchange for commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accepts no responsibility for any loss and/or damage resulting from the use of this publication.

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