(Kitco News) While gold looks set to end the week above $1,800 an ounce, analysts say there is a high chance of a downside move as the Federal Reserve could still surprise the hawkish side.
Despite the rally, the precious metal traded mostly flat for the week, with February Comex gold futures at $1,815 an ounce.
After the Producer Price Index (PPI) rose more than expected, all eyes are now on the November inflation figure.
The CPI print is scheduled to be released on Tuesday, with analysts warning that inflation is likely to remain high and slow gradually.
“The CPI is expected to trend in the right direction next week, but it won’t come down as fast as many expect. I’ll be partial to gold next week,” Edward Moya, chief market analyst at OANDA, told Kitco News. “Post-Fed, gold could falter, but then eventually settle higher. We’re looking at a potential downside for next week, but it will be short-lived.”
What to expect from the Fed
The Fed will announce another rate hike on Wednesday, with markets looking for a slower pace of tightening at 50 bps compared to 75 bps. But the slower pace does not mean the US central bank is moving away from its plan. Fed Chairman Jerome Powell has already warned that interest rates may need to stay higher for longer.
Investors will pay close attention to the updated dot plot, economic forecasts and the language Powell used during the press conference.
“The new dot plot and the new economic outlook are risk factors for gold. The message from Powell and other Fed speakers is that the pace of growth may be slowing, but we may still see a terminal rate that is slightly higher,” TD Securities commodity strategist Daniel Gali told Kitco News. .
Gold is benefiting from a short-term rally that is now coming to an end, Ghali added. “We’ve seen a significant amount of short covering that has helped gold prices rise. As the year draws to a close, money managers are reluctant to put significant amounts of risk on the table. As of this point, most short coverings are now in the rear view and prices are still under the risk of a more hawkish Fed on the horizon,” he said.
How investors interpret the Fed’s messages will also be important, Moya explained. “It will be interesting to see how investors react to the Fed. Will this be the last hike after the break? You can still make the case that they could go another 50 bps in February. And then, in March, it will. It still looks like more there is a need to toughen up,” he said.
Apart from macro data, geopolitics could start playing a bigger role for gold again as the war in Ukraine could escalate, Moya warned.
“This is something we need to focus on. Risks of further escalation of war are again in circulation. This will give gold a bit of a safe haven value,” he said.
Russian forces intensified their operations on Friday in eastern Ukraine’s Donetsk region, shelling the entire front line. Meanwhile, Russian President Vladimir Putin has accused the West of “exploiting” Ukraine and using its people as “cannon fodder.”
Gold price levels to watch
Frank Cholly, chief market strategist at RJO Futures, told Kitco News that gold needs to break its 200-day moving average at $1,821 for another significant advance. “The $1,821 level is very critical. If the market can close above it, then I’m bullish. Right now, gold is struggling to break above the 200-day moving average. It’s also where it peaked last week,” he said. .
Cholly said that the forecast of where the rates will be next year is what will give the direction of the gold next week, and noted that he is closely watching the US dollar.
Ghali said further buying would be at $1,830 an ounce, while a fall to $1,740 an ounce could trigger selling.
Moya sees $1,775 as key support for gold in the current price range and $1,830 as an upper bound.
Data to be reviewed next week
Tuesday: US CPI
Wednesday: Fed rate decision with FOMC economic forecasts
Thursday: ECB interest rate decision, Bank of England decision, US retail sales, US jobless claims, NY Empire State manufacturing index, Philly Fed Manufacturing index
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