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Gold – Optimistic or Pessimistic?

Gold – Optimistic or Pessimistic?

Commentary for Friday, September 15, 2023 ( – Today gold closed up $13.70 at $1923.70, and silver closed up $0.38 at $23.13. When it comes to what the Fed might do next with interest rates the gold trade can’t seem to make up its mind. This confusion is the result of a “cause and effect” problem. When the Fed raises interest rates (the cause) the expected decrease in inflation (the effect) takes time to work its way through the economy. Our latest inflation numbers came in hot, blocking the hoped for dovish FOMC response. But this market remains very transitory. Thursday traders worried that rising inflation would increase Fed hawkishness and hinder gold. Friday negative sentiment moderated, and the price of gold moved higher. An oversold market, higher crude oil and a short covering rally helped this week finish on a positive note. Good Grief – Charlie Brown! Last Friday gold closed at $1918.40 / silver at $22.89 – on the week gold was up $5.30 and silver was higher by $0.24.

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On Monday the price of gold continued to be choppy, trading between $1921.00 and $1930.00. On the day gold finished mildly in the green, but this looks like a sleepy start to another week of rumor and innuendo. The Consumer Price Index for August will be out this Wednesday. But most do not expect much change in these already elevated numbers. I look for more of the same ho-hum market with close trading ranges this entire week, barring lightning strikes.

Next week we will have something more tangible on our hands. The Fed will meet on September 12th and 13th, releasing information after the market close on Wednesday the 14th. There are rumors of a fundamental change in the making but caution is always better than rumor.

Reuters (Deep Kaushik Vakil) – Gold gains as dollar slips with eyes on US inflation data – “Gold rose on Monday, heading for its best session in nearly two weeks as the dollar retreated before this week’s key U.S. inflation reading that could influence the Federal Reserve’s interest rate decision later this month. A weaker dollar contributed to the gains, said Bank of China International analyst Xiao Fu, adding “the worries about a German recession and European slowdown certainly will have some safe-haven supportive factor as well.” The euro zone economy this year will grow slower than previously expected, the European Commission forecast as the biggest economy, Germany, slips into recession. The dollar index fell 0.4% ahead of U.S. inflation data due on Wednesday, making greenback-priced gold cheaper for overseas buyers. That data could make traders revise their bets on whether the Fed has further to go in raising rates, with the CME FedWatch tool currently showing a 42% chance of a hike before 2024. “The medium-term prospects for gold if the U.S. economy does manage to avoid a recession look more challenging,” Kinesis Money market analyst Rupert Rowling said in a note. Ahead of Fed’s Sept. 19-20 meeting this month, Fed policymakers have been clear that they are not itching to raise rates, but few among them are ready to declare victory either. “China’s demand (for silver) seems to be picking up and with the country accounting for about half of global offtake, any improvement here could lend an element of support,” Edward Meir, an analyst who provides research for brokerage firm Marex, wrote in a monthly note.”

On the day gold closed up $4.90 at $1923.30, and silver closed up $0.21 at $23.10.

On Tuesday the price of gold drifted lower in the overnight Hong Kong and London markets, but reversed direction in the domestic New York cash market as traders bought this weakness. But by the end of the trading day, however, gold threw in the towel and finished in the red. The bulls do get a plus today because their fight for higher ground is still above $1900.00.

There are two short term factors weighing on the price of gold. The first, and probably the most important is that our shiny friend has struggled against a stronger dollar since early Monday. The second relates to the August CPI data release expected tomorrow. These two factors have created a generally defensive market as traders brace for the uncertain interest rate picture.

Reuters (Harshit Verma) – Gold slips on dollar rebound as US inflation test nears – “Gold slipped to a more than two-week low on Tuesday as the dollar rebounded, while investors positioned for the U.S. inflation print on Wednesday. “People are getting out of the market and waiting to see how the data comes out, and maybe buy gold at a lower price because there’s still (some) safety buying in gold,” said Bob Haberkorn, senior market strategist at RJO Futures. Making gold more expensive for other currency holders, the dollar index gained 0.3% ahead of the U.S. consumer price index data due on Wednesday, which could influence the Federal Reserve’s interest rate decision. Headline U.S. inflation climbed 0.6% in August, according to a Reuters poll, versus a 0.2% rise the prior month. However, Americans’ overall views on inflation were little changed in August, the New York Fed reported Monday. Higher interest rates dull non-yielding bullion’s shine, with traders betting on a roughly 47% chance of a hike in November after a widely expected pause by the Fed next week, according to the CME FedWatch tool. “Should the inflation figures print above market forecasts, gold prices are likely to depreciate as expectations rise around the Fed having headroom to hike one time this year.” FXTM senior research analyst Lukman Otunuga said. Traders also awaited the ECB’s rate decision on Thursday. ECB euro short-term rate (ESTR) forwards are pricing a bit more than a 50% chance of a rate hike at this week policy meeting. “Europe’s economy is definitely facing a lot of challenges so eventually safe-haven demand will emerge if investors see that the currency is going to be under pressure,” said Harshal Barot, a senior consultant at Metals Focus.”

On the day gold closed down $12.00 at $1911.30, and silver closed up $0.03 at $23.13.

On Wednesday gold was typically choppy between $1906.00 and $1915.00 but most professionals consider this market to be rangebound since May. Which should discount the many short term data points along the way to a recognizable trend, either up or down. During this time the already strong dollar has increased in strength, reacting to a hawkish Fed. Yet gold has steadied itself against this rise, and in fact is still in the fight for pricing above $1900.00.

I’m not suggesting the price of gold is out of the woods. There are forces domestically (a hawkish Fed based on today’s inflation data) and abroad (central banks with their own agenda) which threaten the status quo. Still, I see a defensive market, not one falling out of bed. The so-called big gold downside, if there is one, in this uncoupling game may be surprisingly small.

Reuters (Harshit Verma) – Gold steadies as traders assess impact of U.S. CPI on Fed plans – “Gold steadied on Wednesday after retreating immediately following data showing an acceleration in U.S. consumer prices, on expectations that the inflation readings may not prompt a big change in the Federal Reserve’s interest rate strategy. The Labor Department data showed headline and core CPI in August rose 0.6% and 0.3%, respectively, month-on-month. Economists were expecting increases of 0.6% and 0.2%, respectively. However, traders’ expectations for the Fed leaving interest rates unchanged at its Sept. 19-20 policy meeting only got stronger after the data, while pricing around a 44% chance of another hike before 2024, according to the CME FedWatch tool. “Precious metal investors are less worried about higher inflation and more focused on the costs associated with holding a non-interest bearing asset in a rising rate environment,” said Chris Gaffney, president at EverBank World Markets. But “focus now shifts to the retail sales numbers which some investors feel is an even more important indicator than the CPI info we got today.” Higher interest rates boost yields on competing safe-haven U.S. Treasury bonds, drawing investors away from zero-interest-bearing bullion. Investors are looking forward to U.S. August producer prices, retail sales data and the European Central Bank’s rate hike verdict on Thursday ahead of the Fed’s Sept. 20 policy decision.”

On the day gold closed down $2.20 at $1909.10, and silver closed down $0.22 at $22.91.

On Thursday the price of gold dipped to $1902.00 before the paper trade bought the weakness and pushed prices towards $1910.00, and gold closed almost unchanged on the day. This trade has turned into a ho-hum exercise as the Fed tries to feather in an interest rate policy based on it’s hoped for a cooling inflation trend.

Unfortunately, this “wait and see” approach has not calmed inflation anxiety. That is not to say the Fed is out to lunch – this anticipated change is a matter of timing, and some insiders believe it could take a year or longer for inflation to move significantly lower.

In the meantime, August wholesale inflation rose (0.7%) which was hotter than expected according to CNBC (Jeff Cox). A stronger dollar and retail sales coupled with a rising Producer Price Index suggests the Fed may not turn dovish at the September 19th and 20th meeting.

The Fed’s hawkish sentiment will eventually cool the inflation dragon. But it will also slow down the economy and raise the risk of recession. Some economists are asking if this added risk is worth the price of admission. Does it make sense to “rock the boat”?

Reuters (Harshit Verma) – Gold at 3-week low as strong US data lifts dollar, yields – “Gold prices held near a three-week low on Thursday after higher-than-expected U.S. producer prices data and retail sales numbers raised worries that U.S. interest rates are likely to stay higher for longer, boosting the dollar and bond yields. “We saw some headline inflationary data that was hotter than expected and as a result, we are seeing yields tick higher once again and continue to pressure the spot gold market,” said David Meger, director of metals trading at High Ridge Futures. Data showed U.S. producer prices increased by 0.7% in August, the most in more than a year, while U.S. retail sales increased by 0.6% over Reuters’ expectation of 0.2% during the same period. The U.S. dollar index jumped 0.4% to over six-month high, reducing gold’s appeal for overseas investors, while the yield on the benchmark 10-year note rose 1.8 basis points to 4.266%. “There are concerns that the Fed does have the possibility of continuing to raise interest rates or yields continue to rise and that does apply some pressure to the gold market,” Meger said. Although markets are pricing in that the Fed would hold rates unchanged at their policy meeting next week, there’s a 39% probability of a rate rise in November, according to the CME’s FedWatch Tool. Higher interest rates dull the appeal of bullion, which bears no interest. Earlier in the day, The European Central Bank raised its key interest rate to a record high of 4% on Thursday, but signaled this was likely to be its final move. However, the $1,900 level for gold is fairly well-supported and will attract some bargain hunting, analysts said.”

On the day gold closed up $0.90 at $1910.00, and silver closed down $0.16 at $22.75.

On Friday the price of gold drifted higher as the bullish scenario seems to be getting back on its feet helped by a weaker dollar. The Empire State manufacturing survey suggests an economic contraction – another reason for the Fed to be cautious with interest rates.

Positive economic data out of China (always a big bullion player) encouraged the bullish scenario. But the bearish technical picture for gold must show improvement before the important momentum players will pay attention.

The wild card here is whether the Fed will skip an interest rate hike in September.

Reuters (Harshit Verma) – Gold gains as dollar slips, focus shifts to Fed meet next week – “Gold recovered from three-week lows on Friday aided by the dollar’s retreat after better-than-expected Chinese data and a stronger euro, while traders focused on the Federal Reserve’s guidance on interest rates next week. “We are seeing a consolidation in the euro and the slightly-recovering yuan against the U.S. dollar. This is positive for gold, which is strongly holding above $1,900 per ounce,” said Carlo Alberto De Casa, analyst at Kinesis Money. “Gold holding above the $1,900-level is positive news as it shows the resilience and investor interest in bullion,” he added. The dollar slipped 0.1% against its rivals after hitting a six-month peak on Thursday, making gold less expensive for other currency holders. Data showed China’s factory output and retail sales grew at a faster pace in August, boosting recovery hopes in the world’s top bullion consumer. Investors focus shifted to the U.S. central bank meeting due next week, in which the Fed is widely expected to leave interest rates unchanged. “The outlook for rates to be kept high for longer has been keeping non-yielding gold prices under pressure,” said Yeap Jun Rong, a market strategist at IG. Data on Thursday showed U.S. producer prices increased by the most in more than a year in August while retail sales also beat expectations, boosted by a surge in gasoline prices. Positive Chinese data supported other precious metals, with silver rising 2.2% to $23.13 per ounce, platinum gaining 1.1% to $916.29 and palladium up 1% at $1,263.57. All three metals are heading for weekly gains.”

Jim Wycoff (Kitco) – “Technically, the gold futures bears have the firm overall near-term technical advantage. Prices are trending lower again. Bulls’ next upside price objective is to produce a close in December futures above solid resistance at this week’s high of $1,954.60. Bears’ next near-term downside price objective is pushing futures prices below solid technical support at the August low of $1,913.60. First resistance is seen at $1,947.50 and then at $1,954.60. First support is seen at today’s low of $1,931.20 and then at this week’s low of $1,921.70. The silver bears have the firm overall near-term technical advantage. Silver bulls’ next upside price objective is closing December futures prices above solid technical resistance at $24.50. The next downside price objective for the bears is closing prices below solid support at $22.00. First resistance is seen at $23.75 and then at $24.00. Next support is seen at $23.00 and then at this week’s low of $22.55.”

On the day gold closed up $13.70 at $1923.70, and silver closed up $0.38 at $23.13.

Platinum closed up $18.40 at $926.40, and palladium closed down $3.10 at $1243.80.

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