- After a relatively benign CPI for November and Powell's dovish remarks, $1,900 gold is within striking range
- Strong acceptance of the $1,842-$1,845 level could pave the way for next up-leg toward $1,896
- Significant support seen at $1,788 level
If the Federal Reserve performs to script and wields the 50 basis point rate wand today, gold bulls might find themselves within striking range of the $1,900 level.
Longs in the yellow metal have had it relatively good since futures on New York’s COMEX began rebounding from 2½-year lows of $1,618 an ounce hit in September. In the 12 ensuing weeks, there have been only three in the red, and the price of gold itself has recovered some $200 or 12%.
With Tuesday’s release of the Consumer Price Index, or CPI, report for November indicating lower-than-expected inflation, gold could be planning till the next major US economic data — i.e., the December jobs report scheduled for release on Jan. 6.
Between Wednesday’s interest rate decision by the Fed’s Federal Open Market Committee, or FOMC, and the release of this month’s non-farm payrolls report, there are 23 days in all, accounting for three weeks.
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Ed Moya, an analyst at online trading platform OANDA, said:
“Gold is now comfortably above the $1,800 level ahead of the FOMC decision. The peak for the Fed’s policy rate dropped after the inflation report, and that should keep gold supported here.”
Ahead of Wednesday’s open in New York, benchmark COMEX gold for February delivery hovered at $1,820 an ounce in Asia’s late afternoon trading. It had risen 2% in the previous day’s trade, reaching $1,836.80 — the highest for Comex gold since June 27, or a near six-month high.
The spot price of gold, which is more closely followed than futures by some traders, was at nearly $1,809 after rallying by almost $31 in Tuesday’s trade. The session peak was $1,824.87.
Gold prices jumped after the CPI report said consumer prices expanded by 7.1% in the year to November versus an annual growth of 7.7% in October. “This was the smallest 12-month increase since the period ending December 2021,” the Labor Department said in a statement.
The CPI hit a 40-year high in June when it grew at an annual rate of 9.1%. Since that peak, it has slowed every month, giving back a full 2% over the past five months. “The previous report surprised to the downside,” economist Adam Button said in a post on the ForexLive forum, referring to the 0.5% annual drop for October. “This isn’t quite as big of a surprise, but it’s in the same direction” in prodding the Fed to slow down on its rate hikes, said Button.
The Fed’s target for inflation is just 2% per annum. In a bid to control surging prices, the central bank has added 375 basis points to rates since March via six rate hikes. Prior to that, interest rates peaked at just 25 basis points, as the Fed slashed them to nearly zero after the global COVID-19 outbreak in 2020.
The Fed, which executed four back-to-back jumbo rate hikes of 75 basis points from June through November, is now contemplating a 50 basis point increase at its Dec.14 rate decision.
More important than that is what the next rate hike for February 2023 is looking like: Early indications by money markets on Tuesday suggested a 25 basis point hike. If true, it will match the March increase that began the Fed’s series of rate hikes for 2022.
Such expectations could further weaken the dollar, which has already lost almost 8% in the past three months. The Dollar Index and US Treasuries benchmarked to the 10-year note are basically contrarian trades to gold. When these two declines on concerns related to economic growth or disinflation, gold tends to rise as a safe haven.
Some longs in gold are also anticipating a return to $1,900 levels and above if Fed Chairman Jerome Powell sounds relatively dovish at his news conference after Wednesday’s rate decision.
Longer term expectations among gold bulls are of a sweet spot target of $1,950 — or $130 higher from current levels — to be attained by the time Fed holds its February 1 FOMC meeting on rates. COMEX gold last traded at $1,900 levels in May after peaking at nearly $2,080 in March.
Technical charts for spot gold currently point at a potential high of just under $1,900, though momentum could carry it over in the longer term, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“Following the price action in the previous occasion, a pullback towards $1,798-$1,792 may be seen as a buying opportunity as gold may retest $1,824 and extend the rally towards the next leg higher of $1842, which is 50% Fibonacci level.”
Dixit said strong acceptance of the $1,842-$1,845 level could pave the way for the next up-leg toward $1,896, which is the 61.8% Fibonacci level.
"For day traders, a sustained move above $1,812 may be seen as a buyer’s market, while below $1,808 may be seen as a seller’s market."
Dixit added that spot gold’s daily and weekly stochastics, as well as the Relative Strength Index, continue to provide support for bulls, though $1,842 called for caution.
“The $1,788 level, which is a 200-day SMA and also 38.2% Fibonacci level, holds the key to the current uptrend, failing which a drop to $1,750 and $1,722 is possible. At $1,788, spot gold will see significant support.”
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.