Gold at pivotal crossroads with ambiguous Fed stance

THE market anticipated two major outcomes in 2023: the Fed’s pivot as inflation eases and economic deterioration pushing Western economies a step closer to recession; nothing concrete on both fronts has materialised to benefit gold. Optimism over China’s recovery boosting consumption of bullion has also been swept away. After an impressive 25 per cent rally from the triple bottom in November 2022 to the recent top of US$2,085 per ounce, gold experienced a technical pullback triggered by the renewed dollar appeal and persistent ambiguity over the Fed’s stance.

Gold Comex benchmark future has been trading sideways for the past three weeks, confined to a broad range of US$1,940 to US$1,980 per ounce. No matter how irrational it may appear, the Fed’s stance has become paramount in the financial markets. Fundamentals, technicals, demand and supply mechanisms seem to have faded in significance as the Fed’s position takes precedence.

Gold is generally considered a low-risk, safe haven asset. However, as a dollar-denominated, non-yielding metal, gold is highly vulnerable to fluctuations in the US dollar. While the recent ease in US inflation facilitated the current “Fed’s pause”, it was followed by a spike in US jobless claims, reigniting an appetite for risk in the markets. Risky equities are witnessing a renewed appetite and are weighing over gold prices. The Fed’s recent projection of “higher for longer” rates has increased the metal’s opportunity cost while reducing its demand as a hedge against inflation, posing as a notable hindrance to its flight.

The Fed opened doors to two more 25 basis point hikes which are underpinning the US dollar appeal, making bullion prices vulnerable. However, if we put aside the short-term downward pressure of dollar dominance, the looming recession seems to be the most obvious outcome of 2023. The potential long-term overtightening and looming possibility of an economic meltdown could serve as a silver lining to gold’s appeal.

It would not be unrealistic to forecast gold hovering at around a level of US$2,000 per ounce once again, taking into account the Fed’s pivot, clear signs of western economies entering recession and the softening of the US labour sector. However, if we look at gold’s daily long-term chart between 2020 and 2023, the technical triple top is challenging that sustainability. The likelihood of gold testing newer highs is comparable to the possibility of testing a downside of the 200-day SMA of US$1,844 per ounce (which aligns with the 50 per cent Fibonacci level), particularly with the heightened appeal of the US dollar.

From a technical perspective, gold faces a short-term bearish bias, according to indicators on the daily chart, while the price is testing critical support at the 100-day SMA at around US$1,940. The loss of this level (depicted by the dashed trend line intersection) would point to further declines targeting the US$1,900 level. On the other hand, a sustained recovery over 50-day SMA at US$1,990 would ease the immediate pressure and pave the way to retest the US$2,000 psychological level.

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I highly recommend that bullion investors cautiously observe the upcoming economic indicators and discount events while projecting gold’s price trends. The forthcoming impact of aggressive tightening on the economy is expected to worsen. In a nutshell, an equal part of optimism backs investing in gold for every uncertainty that prevails in markets, while every hawkish turn adds to the headwinds.

The writer is market analyst at Phillip Nova