Editor’s Note: With so much market volatility, stay tuned for daily news! Get caught up in minutes with our quick summary of today’s must-read news and expert opinions. Sign up here!
(Kitco News) – The gold market is ending a five-week losing streak, and while sentiment appears to be changing, some analysts say the precious metal still faces a challenging environment next week.
August gold futures look set to end the week up more than 1%, last trading at $1,721.40 an ounce.
All eyes will be on the Federal Reserve next week as markets expect the US central bank to raise interest rates by another 75 basis points. Some currency analysts have said that although the US dollar has fallen from its recent 20-year highs, the Federal Reserve’s aggressive stance will continue to support the greenback.
“Against a backdrop of a hawkish Fed and slowing global growth, we believe the dollar will resume its broad-based strength before long,” economists at Capital Economics said in a report on Friday.
Marc Chandler, managing director of Bannockburn Global Forex, said that while gold prices have room to move higher next week, the central bank’s decision could limit gains.
“Not only will the Fed most likely hike 75 basis points, but it will also signal that the adjustment is not done. I envision gold struggling near $1,750 and the 20-day moving average just above there. [$1,752],” he said.
However, some analysts see the Federal Reserve’s tightening cycle as having less of an impact on the US dollar and financial markets. Currency analysts at TD Securities see Wednesday’s decision as more neutral for the dollar as the market has priced in a lot of hawkishness.
“This session carries far less weight compared to the last two, and the bar seems high to drastically shift the exchange rate landscape tactically. That said, we see little reason for USD resilience to be undermined, although we see little reason to that it should surge higher from this meeting,” the analysts said.
Faced with growing recession concerns, some analysts have said the Federal Reserve may be nearing the end of its tightening cycle, which would be downright bullish for gold.
“Gold prices rise as fears of a global recession nullify interest rate hike expectations for all major central banks. Gold is starting to act as a safe haven as weakened economic growth will force many central banks to abandon their aggressive tightening plans,” said. “Edward Moya, senior market analyst at OANDA. “Gold may find resistance at the $1,750 level, but if it doesn’t, not much will get in the way until the $1,800 level.”
On Friday, preliminary data from S&P Global Market Intelligence showed that activity in the US manufacturing and services sector fell to the lowest level in two years. The decline in activity reflected a similar weakness in Europe.
“The market feels that the rate hike cycle will end sooner due to rapidly slowing growth. Friday’s US services PMI was shockingly soft and means the Fed will stall around 3% and will likely cut in 2023. When these cuts really materialize, gold will rise on USD weakness,” said Adam Button, chief currency strategist at Forexlive.com.
On Thursday, markets will wait anxiously to see if the US has slipped into a technical recession following the release of the first reading of second quarter GDP. Many economists have dismissed weakness in the first quarter as a trade imbalance; however, data from the Atlanta Federal Reserve shows that GDP fell by 1.6%, matching the decline in the first quarter. The traditional definition of a recession is two quarters of consecutive declines.
Last week, Bank of America said it sees the U.S. falling into a mild recession by the end of the year.
Another European crisis
Along with the Federal Reserve’s monetary policy decision, analysts have also said they will be watching the ongoing geopolitical uncertainty unfolding in Europe. On Thursday, Italy descended into political turmoil after Prime Minister Mario Draghi resigned following the collapse of his national unity government. It is expected that the nation will hold snap elections in the autumn.
At the same time, economists continue to digest the European Central Bank’s announcement on the transfer protection instrument. The program will be used to buy bonds from members of the Eurozone to ensure that all returns are in line and avoid fragmentation risk.
John Hathaway, portfolio manager for Sprott Hathaway Special Situations Strategy, said in an interview with Kitco News that Europe could be close to a sovereign debt crisis as the central bank continues to expand its balance sheet.
“Gold prices could easily be pushed back above record highs if there is any crisis in the currency markets,” he said. “The next black swan out there will be linked to unruly currency markets.”
Christopher Vecchio, senior market analyst at DailyFX.com, said he also sees a growing risk of a sovereign debt crisis in Europe. He added that in this environment both gold and the US dollar will benefit.
“As long as there are concerns about the euro, there is room for both gold and the US dollar to trend higher,” he said.
Data to look at
Other economic data economists will be watching next week include consumer confidence from the US Conference Board, pending home sales and personal income and spending data.
Tuesday: Consumer confidence, sales of new homes,
Wednesday: Durable Goods Orders, Pending Home Selling, FOMC Decision and Statement
Thursday: Advance Q2 GDP, weekly jobless claims
Friday: Personal consumption, personal income, PCE inflation
Disclaimer: The views expressed in this article are those of the author and may not reflect the views of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is for informational purposes only. It is not an invitation to exchange goods, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept responsibility for any loss and/or damage arising from the use of this publication.