Gold price encounters big risk ahead of CPI data

Gold is trading at $1693.70 per ounce at the time of writing versus Thursday’s closing price at $1711.75. So, the gold market tends to be at risk despite its sudden recovery above $1,700 an ounce during the week. Gold failed to hold the $1700 level for long.
Analysts point to next week’s inflation data (Consumer Price Index) as the deciding factor between bearish and bullish sentiment is going into the year-end.

After posting six months of consecutive losses between April and September, gold has kicked off the fourth quarter with strong performance. December Comex gold futures were last at $1,711.60, up 2.4% on the week.

The precious metal climbed on rising risks in the financial markets and a potential slowdown in the economy. The negative news increased bets for the Fed to push the brakes of its aggressive tightening cycle.

Some big risk events on the horizon helped gold recover. The UK if facing the deadline on its bond purchases in a week, and they might have to announce measures over the weekend. The Bank of Japan had to intervene to support the Japanese yen. Markets could also see more emergency action from central banks, which suggests global market risks are raised.

All macro data cooperated with that view. Friday’s September jobs report once again confirmed that the employment situation is still strong, with the unemployment rate dropping to 3.5%. And according to analysts, that’s not a level the Fed would be rushing to change its policy.

Analysts are warning that this week’s gold rally could reverse if rate hike expectations climb. This could be a short-lived rally partly because a lot of the investment rationale for holding gold right is that the Fed could pivot and slow down rate hikes.

The baseline assumption is that we have already seen other central banks pivot. But other central banks will be quicker to pivot than the Fed. The US central bank is unlikely to flip-flop quickly as that will hurt its credibility.

As markets continue to digest the latest data, it is important to keep in mind that employment is a lagging indicator.

The Fed was perhaps more worried about appearing to tackle inflation than was warranted. For gold, this means some serious weaknesses in the short term. But at the end of this year or beginning of next year, there could be an explosive rise in the gold price if the effects of high rates filter through.