Gold remains undermined ahead of central bank action

14 сент. 2023 г.

The opportunity cost of holding gold, a non-interest-bearing metal, has been rising due to the fact government bonds have been providing much better nominal yields of late. For gold to start shining again, we will need to see clear signs that the days of contractionary monetary policy are numbered. For now, we are not there. But while there is increased risk of further short-term weakness, the longer-term outlook remains bullish.

ECB, FOMC, BOE decisions loom

The ECB is set to kick off the upcoming central bank meetings today, with a decision that hangs in the balance. Gold investors will be looking out for signs that interest rates have peaked. But if the ECB is more hawkish than expected then this may keep gold undermined. More central bank action will follow next week, with the Fed, BoE and SNB all set to announce their latest policy decisions. We will also have the latest global PMIs among other data highlights to look forward to.

For now, the inflation battle continues for many major central banks, including the ECB and the Fed.

On Wednesday, for example, the latest CPI data from the US come in stronger. While it didn’t necessarily lead to renewed strength for the dollar, it nevertheless kept the greenback supported near its recent highs, holding back gold, and currencies where the central bank is expected to turn dovish – the likes of the euro and pound.

It is difficult to be too bullish on gold right now as the renewed surge in inflation may force the Fed to hike interest rates perhaps one more time before the end of the year. And with oil prices rising, this will further encourage them to keep monetary policy in contractionary mode and rates at these high levels for longer.

That being said, there is no doubt that gold remains an attractive long-term investment in my mind. It is just that there is increased risk of a short-term correction due to the reasons mentioned. In the slightly longer-term outlook, we should see renewed strength come back to gold as central banks start loosening their monetary policies again. The other bullish argument for gold is that it is a haven asset. With fiat currencies have been devalued around the world due to high inflation, gold, often viewed as a good inflation hedge, should remain supported – which is why we saw a new record high earlier this year.

Gold holds losses as CPI makes biggest increase since June 2022

In case you missed it, US CPI rose 0.6% month-on-month, which was the biggest increase since June last year. This caused the annual CPI to accelerate to +3.7%, reaching its highest level since May, above expectations for +3.6% and up from the +3.2% y/y increase in July. The monthly core CPI was also stronger at +0.3% vs. +0.2% eyed, although the annual pace of core CPI slowed to +4.3% Y/Y from +4.7% in July, in line with estimates.

So, the key takeaway is that inflation is still too high for the Fed to relax, keeping alive the possibility for one more rate hike this year. This should keep the dollar supported on the dips, potentially causing gold to break further lower and the likes of the EUR/USD and GBP/USD to turn lower again.



As far as gold is concerned, well the metal is still printing bearish price action, so the path of least resistance remains to the downside for as long as gold maintains its bullish bias. Where gold goes from here will depend on the direction of the US dollar. After rising for the 8th consecutive week, the Dollar Index has been slightly weaker so far this week. But today’s inflation data could influence the Fed to maintain hawkish. The market appears convinced that the Fed won’t hike in September. However, probability of a hike in November has now risen. Even if the Fed opts against hiking this year, traders will be expecting interest rates to remain at current levels longer than they had previously been expecting. This is what has helped to keep the dollar underpinned in recent weeks.



Gold technical outlook bearish while it holds below 200-day average

Gold is finding itself about $10 above $1900 again after its latest attempt to move higher failed. The precious metal has broken below its technically important 200-day moving average and held there after the US CPI came in stronger, despite some of the major FX pairs finding some support. If gold continues to hold below the 200-day, this will encourage the bears even more in the days ahead, while a move back above could trigger follow-up technical buying. All told, a break below $1900 looks like a strong possibility now, with the bears eyeing liquidity below the August low of $1885 next.

By Fawad Razaqzda, market analyst at FOREX.com