Market conditions are aligning for the gold market as the precious metal benefits from safe-haven demand and growing expectations that the Federal Reserve will cut rates sooner than expected.
The gold market is ending the week testing resistance at $2,050 an ounce and according to some analysts, the precious metal still has room to move higher as bullish momentum is just starting to pick up.
February gold futures are looking to end the week at $2,047 an ounce, nearly unchanged from last Friday’s close. Although the yellow metal is unable to close the week with a gain, some analysts note that investors shouldn’t be too disappointed as prices are well off their four-week lows seen at the start of the week.
Ole Hansen, head of commodity strategy at Saxo Bank, said that while it might be too early to see a breakout rally, investors shouldn’t fight the bullish momentum.
“The strong rejection at key support earlier in the week has most certainly reignited a belief in higher gold prices,” he said. “From an RSI perspective, gold is nowhere near overextended so if it manages to break $2,064, we could be looking at $2,088 next.”
Gold is seeing renewed interest from safe-haven demand as investors look for some portfolio insurance ahead of the weekend due to growing turmoil in the Middle East. Gold’s rally came after the U.S. and U.S. and British warplanes, ships, and submarines launched dozens of air strikes across Yemen overnight in retaliation against Houthi forces for months of attacks on cargo boats in the Red Sea.
Tensions have continued to escalate as a result of the ongoing war between Israel and Hamas in Gaza.
“Now that the UK and US are going all in, traders have run for safety,” said Naeem Aslam, chief investment officer at Zaye Capital Markets.
At the same time, gold is also benefiting from growing expectations that the Federal Reserve will cut interest rates as early as March. Markets continue to price in aggressive rate cuts even as the U.S. central bank has signaled that it sees three rate cuts this year.
According to the CME FedWatch Tool, markets see a nearly 80% chance of easing in March. This time last week, markets were pricing in a 64% chance.
Expectations surged higher Friday after the U.S. Labor Department said its Producer Price Index fell 0.1% in December. Although inflation remains relatively elevated, economists note that weak producer prices indicate that consumer prices will fall.
“It’s clear from today’s readings that disinflationary pressures remain in the pipeline, which should give the Fed confidence over the coming months that inflation is heading back to target,” Craig Erlam, Senior market analyst at OANDA, wrote in a note Friday. “Not only are markets now almost fully pricing 150 basis points of cuts this year, but they’re pricing in a greater than 50% chance of 175, with the first heavily backed to come in March. And to think, many people thought markets ended last year too bullish on rate cuts.”
Erlam noted that the growing market expectations have pushed the yield on U.S. 10-year notes below 4% and two-year yields have fallen to an eight-month low. The drop in bond yields is creating a tailwind for gold.
Although momentum is growing, Erlam noted that the market still has some ways to go before it reaches last month’s all-time highs.
However, not all analysts are optimistic that gold prices can go higher. Economists at Commerzbank said that they still expect the Federal Reserve to cut rates only in May.
“The longer waiting period could lead to disappointment and, in the short term, to setbacks [in gold prices]. The continuing outflows from gold ETFs also speak in favor of this,” said Barbara Lambrecht, commodity analyst at the German Bank.
Looking ahead, markets will continue to pay close attention to economic data and the major report next week will be U.S. retail sales. Meanwhile, world leaders will assemble in Davos, Switzerland, which could create further geopolitical tension, supporting gold’s safe-haven allure.
“US retail sales are likely to have grown solidly in December, with consumer confidence buoyed by rising equity markets,” economists at ING said in a note.
Written by Neils Christensen for KITCO ~ January 12, 2024
