(Kitco News) - A lot more appears to be going on in the gold market than monetary policy alone can explain, as prices continue to hold critical support heading into the weekend, even after the Federal Reserve raised interest rates and signaled further tightening by year-end.
Analysts note that gold’s resilience is particularly notable given the traditional headwinds facing the precious metal. The Federal Reserve raised the federal funds rate by 25 basis points on Wednesday, while Fed Chair Kevin Warsh maintained a hawkish tone as the central bank continues its fight against persistent inflation.
At the same time, U.S. bond yields remain elevated, with the 10-year Treasury yield hovering near the psychologically important 5% level.
Yet instead of breaking down, gold has managed to hold its ground. Spot gold last traded at $4,386 an ounce, up nearly 1% on the week and on track to snap a three-week losing streak.
Analysts have said that the reason behind gold’s resilience is relatively simple: investors are increasingly looking beyond incremental changes in interest rates and focusing on the much larger structural forces supporting it, including deteriorating government finances, persistent inflation, geopolitical uncertainty and changing global reserve allocations.
Fed rate hikes aren't the whole story
Chris Vecchio, head of futures and forex strategy at Tastylive, said gold is ending the week on solid footing because investors are looking beyond the Federal Reserve’s latest 25-basis-point rate hike.
Although the central bank raised rates and signaled that further tightening is likely, Vecchio noted that its updated economic projections point to a shallower and slower hiking cycle than markets had previously priced in.
The Fed’s projected year-end rate of 4.1% suggests only modest additional tightening following September’s move, rather than the more aggressive hiking cycle investors had feared.
At the same time, Vecchio said the factors that have driven gold higher despite rising bond yields remain firmly in place.
He pointed to concerns about U.S. fiscal stability, deteriorating government finances, weaker marginal demand for U.S. government debt and reduced demand for U.S. dollars as global trade becomes increasingly fragmented. These factors are all working to support gold, even as they push bond yields higher.
In a recent interview with Kitco News, Jeff Sarti, CEO of Morton Wealth, said that the Federal Reserve’s latest move is secondary to the bigger forces driving gold.
He pointed out that the Federal Reserve is operating within a fiscal landscape dominated by persistent government spending and large deficits. In his view, monetary policy is increasingly “backed into a corner,” leaving the bond market to ultimately determine how sustainable the current fiscal trajectory is.
“I think any minor 25 basis points here or there is noise,” he said. “I think the bigger signaling points are fiscal.”
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said gold’s price action following Wednesday’s rate decision suggests that the Federal Reserve’s monetary policy is largely priced into the market.
“Heading into the weekend, gold appears to have shrugged off the US rate hike,” Hansen said.
With no surprises from the central bank, Hansen said that he is paying attention to renewed investment demand. He pointed out that holdings in gold-backed exchange-traded funds have climbed to a seven-month high despite the precious metal’s recent price weakness.
“This highlights a market where demand from less interest-rate-sensitive investors remains firm, even with yields still elevated,” Hansen said.
Hansen compared the current environment to 2022 and 2023, when aggressive Federal Reserve rate hikes and rising bond yields failed to generate the kind of sustained weakness in gold that would traditionally have been expected.
“Then, as now, underlying demand from investors is less sensitive to interest rates and yields provided an important offset to traditional macro headwinds,” he said. “For now, that underlying demand appears to remain intact, and I maintain a bullish outlook that is being slowed but not halted by rate hikes.”
Gold faces an important technical test
Although the fundamental backdrop remains supportive, analysts said gold still needs to clear some important technical hurdles before the market can establish a more sustained recovery.
Vecchio noted that a potential head-and-shoulders breakdown ultimately produced a false breakout, as gold has remained above the downtrend from its January all-time high.
Hansen is also watching the downtrend closely. He said gold is testing the relatively steep downtrend from the August high around $4,700 an ounce, putting the focus on resistance between $4,420 and $4,440.
A break above that zone, he said, would strengthen the case for a more sustained recovery toward the 200-day moving average, currently around $4,540.
Vecchio added that if the 10-year Treasury yield remains below 5% and oil prices continue to retreat, gold and silver could have a “cleaner path” higher.
With a relatively quiet week for economic data, analysts have said that gold will be paying close attention to peripheral markets, including the U.S. dollar, bond yields and oil prices.
Economists note that rising inflation continues to put pressure on global monetary policy; however, the Swiss National Bank continues to buck the growing worldwide trend.
“We expect the SNB to leave its policy rate at 0% and to retain its targeted approach to foreign exchange intervention. As long as domestic inflation remains subdued and the franc stays strong, albeit without appreciating excessively, the SNB can continue to run a significantly more accommodative monetary policy stance than most other central banks,” said Charlotte de Montpellier, Senior French and Swiss Economist at ING.
Markets will also be paying close attention to U.S. manufacturing data. Meanwhile, a slew of U.S. central bank speakers next week could create some headline risk. Markets will be watching closely for any indication of how officials view the path of monetary policy following this week’s rate hike, and particularly whether persistent inflation will require additional tightening before year-end.
Economic data to watch next week:
Wednesday: S&P Global Flash PMI data
Thursday: Swiss National Bank monetary policy decision, US weekly jobless claims,
Friday: US Durable Goods Orders, Revised University of Michigan Consumer Sentiment
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