- Gold price stalls after rising on the back of US data failing to meet expectations.
- XAU/USD pulls back after Federal Reserve officials say more work needs to be done to bring down inflation.
- Never mind deposits, what about bank’s assets? Questions economist who sees crisis reviving and Gold exceeding $2,000.
- Gold may be forming a triangle in an uptrend. If ‘the trend is your friend’, bulls may be right.
Gold price (XAU/USD) stalls after early gains on Friday, exchanging hands in the $1,970-80 range in the European Session, after the release of poorer-than-expected US data provided the safe-haven with a bid. The sudden weakness may be attributed to reports that over the last 24-hours three members of the Fed have talked about the necessity for more action on inflation, perhaps including rate hikes. Traders now look to the release of the Fed’s preferred gauge of inflation, the Personal Consumption Expenditure (PCE) – Price Index, for clarity on the Bank’s next policy move.
A gift to Gold bulls from lower-than-expected US data
Data out on Thursday showed an unexpected rise in the number of out-of-work people claiming unemployment support in the US from 191K to 198K – higher than the 196K forecast by economists. US Gross Domestic Product (GDP) for the fourth quarter also moderated down to 2.6% from 2.7% in Q3, when 2.7% had been forecast.
The overall reaction to the data was for the US Dollar to sell-off and US Treasury yields to pullback, reflecting investors’ view that the probabilities had slightly decreased for the US Federal Reserve to raise interest rates at their May meeting.
Gold price rose as the US Dollar weakened and the outlook for interest rates declined. Gold generally rises as interest rates – which the Fed sets – decline, since they lower the opportunity cost of holding the bright metal vis-a-vis staying in cash or cash equivalents.
Fed members talk up possibility of future hikes
Over the last 24-hours no less than three members of the Federal Reserve Open Market Committee (FOMC) – two of them voting members – have come out at said they think more should be done to combat persistent inflation.
“Inflation remains too high, and recent indicators reinforce my view that there is more work to do to bring inflation down to the 2% target associated with price stability,” Federal Reserve Bank of Boston leader Susan Collins said in remarks to a gathering of the National Association for Business Economics. It should be noted that Collins is not a voting member of the FOMC.
Next, Neel Kashkari, head of the Minneapolis Fed said the institution has “more work to do,” but he did not state what form that would take. Kashakari does have a vote on the FOMC.
Finally, Federal Reserve of Richmond President Tom Barkin said in a speech to the Virginia council of CEOs on Thursday that, “If inflation persists, we can react by raising rates further. It was only a few weeks ago that some were calling for a 50-basis-point increase.”
At the time of writing, the Fed Funds Future Curve, a highly considered market gauge of future Fed policy moves was showing an increased 58% chance of a 0.25% hike in May versus a 42% probability of no-change.
This shows a substantial shift from the reading a days ago, when the same indicator was showing ther chances of a Fed hike at only 44%.
Some analysts still expect the Fed to raise rates by more than just one 0.25% hike, before it ends its tightening cycle. Analysts at ANZ Bank, for example, forecast the Gold price to remain capped at current levels as the Fed will continue raising interest rates, possibly to 5.5% (from a current 5.0% level).
“Further upside in the Gold price looks limited in the short term, as we see the federal fund rate at 5.5%,” says the bank.
“Gold is well supported by US recession fears, easing inflationary pressure and more dovish monetary policy. Nevertheless, the upside looks limited in the near term amid easing banking risks and further Fed rate hikes,” adds ANZ.
Yet the Australian lender also sees more upside as possible on further banking risks, which would increase safe-haven flows to the yellow metal.
Inflation data could be key on Friday
The next significant release on the economic docket for Gold is the preliminary PCE price index for March, which is out at 12:30 GMT on Friday. This will provide a perspective on inflation and could impact the Fed’s decision making ahead of its next meeting.
A higher-than-expected result could increase the chances the Fed will raise rates to combat inflation, with negative implications for the price of Gold. A lower-than-expected result will raise the chances the Fed will do nothing, that rates may have peaked and would likely be positive for Gold.
Gold to rise as banking crisis not over, says esteemed economist
The banking crisis is far from over and when it reignites the price of Gold will rise above $2,000 an ounce as people grope for safety, according to distinguished economist, David Rosenberg, the founder of Rosenberg Research.
So far the analysis of the banking crisis has focused on deposit risk but people are ignoring equally disturbing risks from the assets banks hold, argues Rosenberg in an interview with Kitco.com
“Everybody’s focused on deposit insurance, concentrated uninsured deposits on the liability side of the balance sheet. But you know, the other part of the story is going to be what do the assets look like?” The economist said.
The availability of credit is shrinking, inflation remains high and the US is on the brink of recession. When people tighten their belts the risk of rising default rates on many of the loans held by regional banks could push a fresh tranche of lenders over the edge.
“Nobody talks about the quality of the assets – these traditional loans, especially as they pertain to commercial real estate business loans, credit cards and auto loans. A lot of these loans are held at the regional bank level,” said Rosenberg.
Gold price technicals: Triangle forming in an uptrend
Gold price may be forming a symmetrical triangle price pattern in the midst of an established medium-term uptrend. The price of the precious metal continues to make higher highs and lows on the daily chart and the current consolidation is more probably a continuation pattern than not. According to the market maxim, “The trend is your friend until the bend at the end,” the technical outlook thus favors bulls.
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Gold price: Daily Chart
A break above the key $2,009 March top would provide confirmation of further upside. The next target for Gold price would then lie at the $2,070 March 2022 highs.
The key $1,934 March 22 swing low must hold for Gold bulls to retain the advantage. Yet, a break and close on a daily basis below that level would introduce doubt into the overall bullish assessment of the trend. Such a move would probably see a sharp decline to support at $1,990 supplied by the 50-day Simple Moving Average (SMA).
A closer inspection of the symmetrical triangle pattern on lower timeframes may offer traders opportunities to enter breakout trades at more daring levels than the broader range parameters highlighted above.
