June 5, 2023

Should gold investors sell into the rally? Analysts are weighing a $50 move

(Kitco News) Gold rose to near $50 on Friday as the latest US jobs report clarified some mixed messages from the Federal Reserve and China signaled a possible easing of its Covid-Zero policy. But caution is still advised, as all previous rallies have been used as selling opportunities.

Gold’s November is off to a great start after it reported its longest monthly losing streak in more than five decades.

The news sent markets reeling for the week as the Fed raised key interest rates by 75 basis points for the fourth straight time.

Powell said the U.S. central bank is now paying close attention to “cumulative tightening” and potential “lags” in which monetary policy affects inflation and economic activity.

But on the hawkish side, the Fed chairman stressed that the “ultimate level” of interest rates must be higher than previously expected, adding that the window for a soft landing has “narrowed”.

Things looked golden on Friday morning when the US jobs report for October showed the unemployment rate rising to 3.7% despite a bigger-than-expected job gain.

“This report shows that the labor market is cooling, and that’s good news. Gold is up as the dollar has its worst day since March 2020,” Edward Moya, senior market analyst at OANDA, told Kitco News. “The market now believes that the Fed has got a good handle on things and could go slower.”

But a slowdown in rate hikes doesn’t mean the Fed won’t hike. “The market is starting to price the Fed into 5.25%, and the two-year yield is nowhere near that,” Moya said.

Following the news, the 2-year Treasury yield rose more than 50 basis points to surpass the 10-year yield — a key recession gauge that is now near 40-year highs.

“The market thinks the economy is slowing down, and that’s reflected in the yield curve, the 2-year and the 10-year,” Bart Melek, head of global commodity strategy at TD Securities, told Kitco News.

But that’s not even the whole picture. Market expectations of China relaxing its Covid-Zero policy also boosted gold. “We’re getting speculation that China will remove or at least relax the Covid-Zero restrictions, which will rally the entire market,” Melek said.

Insights from the demonstration

Despite Friday’s stellar performance, many analysts do not believe this rally will last, as gold’s long-term trend has been bearish.

“This is likely a short squeeze rally that should be sold here,” Melek said. “It is too early for gold to rise. The Fed is not ready yet.”

TD Securities predicts gold will fall below $1,600 in the coming months as it sees the federal funds rate peaking at 5.5%, down from below 5% previously. “When the economy slows down, you start to see real interest rates jump. And central banks aren’t buying as much gold as they did last quarter. Carrying costs are expensive,” Melek added.

Every time gold has rallied recently, selling came into the market, Kevin Grady, president of Phoenix Futures and Options, told Kitco News. “We saw a lot of people get out of gold earlier and this is a short rally. Gold will continue to have a tough time,” he said.

All eyes are now on the gold “average” of about $1,685 an ounce. “This is the high that we’re stuck in,” said Frank Cholly, senior market strategist at RJO Futures. “We will probably see the rejection of this demonstration.”

At the time of writing, December Comex gold futures were trading at $1,676.40, up 2.79% on the day.

Cholly advised exiting long positions and taking profits before the dollar’s strength returned. But if gold rises above the level of $1,685 an ounce, the outlook will change. “If we’re above $1,685, I’ll reconsider the strategy,” he told Kitco News.

Whether gold can break above the next key resistance level and then move to $1,700 an ounce will depend on next week’s inflation data. If the data shows that price pressures are easing, gold could move into that range, Moya said. But a hotter-than-expected number would set a bearish tone.

Market consensus calls expect the October consumer price index to slow down to 8% from September’s 8.2%.

Next week’s information to view

Thursday: US CPI, unemployment benefits

Friday: Michigan Consumer Opinion

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect his own 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 a solicitation to make exchanges in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for any loss and/or damage arising from the use of this publication.

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