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(Kitco News) – The gold market remains locked in a tug of war between rising interest rates and inflation; however, momentum may be shifting to the bullish side as prices end the week at the top of their range above $1,850 an ounce.
Gold prices have hovered around $1,850 an ounce for the past three weeks. After intense selling pressure early on Friday, the precious metal made a dramatic rally as prices rebounded from support just above $1,825 an ounce.
August gold futures are expected to end the week up 1.5%, last trading at $1,876.50.
According to some market analysts, disappointing economic data, including higher-than-expected inflation, provided further bullish impetus for the precious metal. At the same time, greater weakness in equity markets is enhancing gold’s safe-haven allure.
“Gold is doing exactly what it should be,” said Bob Haberkorn, senior market analyst at RJO Futures. “Investors are once again looking to gold as an inflation hedge and a safe-haven asset.”
Overall market sentiment turned negative on Friday after the US Labor Department said its Consumer Price Index rose 8.6% on year in May. Consumer prices hit a 40-year high, driven by rising food and energy prices.
A little later on Friday morning, the University of Michigan said its consumer confidence index had dropped to 50.2, its lowest level in 50 years. At the same time, consumers expect inflation to rise by 5.4% over the next 12 months.
Haberkorn said the selling of stocks and the rally in gold indicate that the market is starting to realize that there is nothing the Federal Reserve can do to tame inflation.
While the US central bank will continue to raise interest rates, they will not be high enough to match inflation.
“In this environment, what you really want is gold,” he said.
Ole Hansen, head of commodities strategy at Saxo Bank, said rising consumer prices are raising the risk of a policy error, not just by the Federal Reserve, but central banks around the world.
Gold still has to deal with the Fed and rising interest rates
While momentum currently favors gold bulls, the market still faces some challenging headwinds as the Federal Reserve is expected to raise interest rates by 50 basis points next week.
Hansen said he is neutral on gold next week as the market is trying to figure out how high interest rates will be.
“Right now, investors don’t know which way the market will go,” he said. “I don’t want to get involved in gold until we see a sustained move above $1,875.”
Bart Melek, head of commodities strategy at TD Securities, said gold prices could fall below $1,850 an ounce next week after the US central bank’s monetary policy meeting. He added that in the short term, rising interest rates are still negative for gold.
However, Melek added that the question remains to what extent the Federal Reserve will be committed to controlling inflation and whether they will risk pushing the economy into recession.
Longer term, Melek said he remains bullish on gold as he expects the Federal Reserve “to get rid of interest rate hikes.
“The Federal Reserve is not prepared to do whatever it takes to control inflation,” he said.
Follow consumption data next week
As markets watch for inflation, analysts and economists also say investors need to keep an eye on consumption figures with US retail sales in focus next week.
Hansen said that if inflation continues to affect consumers, weaker consumption will lead to lower economic growth.
Economists note that a strong job market and high savings have helped sustain consumers so far this year; however, savings declined due to declining purchasing power.
“The squeeze in real incomes due to higher prices will weigh particularly heavily on spending on goods ahead, given the excesses in this area of the economy over services. And with higher interest rates limiting demand for big-ticket items and housing, total consumption growth is expected to slow in the second half of the year,” economists at CIBC said.
Next week’s data
Tuesday: US PPI
Wednesday: US retail sales, Empire State Manufacturing Survey, FOMC monetary policy meeting
Thursday: Swiss National Bank Monetary Policy Meeting, Bank of England Monetary Policy Meeting, Philadelphia Fed Survey, Weekly Unemployment Claims, US Housing Starts Bank of Japan Monetary Policy Meeting
Friday: Federal Reserve Chair Jerome Powell makes welcoming remarks at conference on US dollar international roles
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