Gold has endured another volatile week, but Wall Street analysts are becoming increasingly optimistic about the precious metal as markets prepare for the Federal Reserve’s next interest rate decision.
Spot gold finished the week around US$4,349 an ounce, down approximately 1.65% for the week, despite recovering from a sharp selloff. The metal fell as high as approximately US$4,292 before buyers returned to the market.
The latest Kitco Gold Survey shows that professional analysts have once again shifted towards a more bullish outlook.
Of the 14 analysts surveyed, nine, or 64%, expect gold to rise over the coming week. Only two analysts, or 14%, expect prices to fall, while three expect gold to trade broadly sideways.
Retail investors remain cautiously optimistic. Of 218 votes in Kitco’s online survey, 53% expect gold to rise, while 24% expect a decline and 23% anticipate relatively stable prices.
The results suggest that, despite gold’s recent pullback, confidence in the longer-term direction of the market remains strong.
Gold caught between inflation and interest rates
Gold began the week above US$4,400 an ounce and initially moved higher, reaching approximately US$4,443.
However, the rally lost momentum as rising oil prices, higher US Treasury yields and expectations of higher interest rates put pressure on precious metals.
Concerns surrounding the conflict involving Iran and the Strait of Hormuz have added another layer of uncertainty to financial markets. Higher energy prices can increase inflation, making the Federal Reserve more likely to maintain or increase interest rates.
That combination has traditionally created headwinds for gold because higher interest rates can make interest-bearing assets such as government bonds more attractive.
The latest US inflation figures added to that uncertainty.
Producer prices increased in August, while consumer inflation also remained elevated. Markets responded by increasing expectations that the Federal Reserve could raise interest rates at its upcoming meeting.
Gold subsequently fell below US$4,350 and briefly traded below US$4,300.
However, buyers quickly returned.
Investors continue buying the dips
The recovery towards the end of the week was particularly important because gold managed to attract buyers despite a stronger US dollar and higher bond yields.
Adrian Day of Adrian Day Asset Management said gold’s ability to remain resilient in this environment was a sign of underlying strength.
The market is increasingly demonstrating that investors are prepared to buy gold when prices fall, rather than simply abandoning the market.
That behaviour is important because it suggests that there is still strong demand underneath the market.
Gold has also continued to benefit from a much broader trend: central banks around the world continue to add gold to their reserves.
For many investors and governments, gold remains a form of financial insurance against inflation, currency weakness, geopolitical instability and growing government debt.
What happens if the Fed raises rates?
The Federal Reserve meeting is now the biggest event on the market’s radar.
Markets have been heavily pricing in the possibility of a 0.25 percentage point interest rate increase.
At first glance, a rate increase should be negative for gold.
But the situation is more complicated.
Much of the expected rate increase has already been reflected in financial markets. If the Federal Reserve delivers the widely anticipated increase, investors may have already positioned themselves for it.
That could create a situation where gold initially falls, only to recover once traders begin looking beyond the rate decision.
Marc Chandler of Bannockburn Global Forex believes gold could move higher heading into the Federal Reserve meeting and sees the possibility of prices moving towards the US$4,460 to US$4,510 area.
He also noted that if the Federal Reserve does not raise rates, gold could react sharply higher.
A rate hike may not be enough to stop gold
Bob Haberkorn of StoneX Group believes the market is already beginning to question how much further the Federal Reserve can realistically raise interest rates.
Higher interest rates come with consequences.
The United States is carrying an enormous government debt burden, meaning higher borrowing costs can place additional pressure on government finances and the wider economy.
Haberkorn believes that even if the Federal Reserve raises rates by another 0.25 percentage point, the impact on gold could be relatively limited.
“If they do hike and they do a quarter, I think we will see metals pull back, but I don’t think the pullback is going to be as bad as it normally would,” he said.
His view is that there may simply be a limit to how far interest rates can rise before the economic consequences become too significant.
If the Federal Reserve decides not to raise rates, however, Haberkorn believes gold could move substantially higher.
He suggested that gold could eventually make another attempt at US$5,000 an ounce if the Fed leaves rates unchanged.
US$4,400 remains an important level
Gold’s repeated struggle around US$4,400 has made that price an important psychological level for traders.
Jesse Colombo, founder of the BubbleBubble Report, believes the market’s recent decline may have been exaggerated because traders were positioning for a particularly strong inflation report.
When the inflation figures failed to produce an even bigger shock, buyers returned.
Colombo believes a sustained move above US$4,400 would provide an important signal that the recent weakness may have run its course.
He expects gold could move towards US$5,000 over the coming months if the market can establish itself above that level with strong buying support.
The bigger picture remains supportive
Beyond the immediate Federal Reserve decision, there are several forces supporting gold.
Central banks continue to diversify their reserves.
Government debt continues to rise.
Geopolitical tensions remain elevated.
Energy markets remain vulnerable to disruption.
And investors continue to look for assets that are not directly dependent on the financial strength of a government or company.
Alex Kuptsikevich of FxPro noted that gold continues to attract buyers whenever prices move towards the US$4,300 region.
That buying behaviour is significant.
A sustained bear market normally sees investors rush for the exits when prices fall. Gold, however, continues to find buyers on weakness.
That suggests many investors continue to view price declines as opportunities to accumulate rather than reasons to sell.
The week ahead
The coming week could be one of the most important for financial markets in recent months.
The US Federal Reserve will announce its latest interest rate decision on Wednesday, followed by a press conference from Federal Reserve officials.
Markets will be watching not only the decision itself, but also what the Fed says about future interest rates.
The Bank of England and Bank of Japan will also announce monetary policy decisions during the week.
US retail sales, employment data and other economic figures will add to the market’s assessment of where interest rates are heading.
For gold investors, however, the key question is straightforward:
Can gold continue to attract buyers even when interest rates and bond yields are rising?
So far, the answer appears to be yes.
Gold has fallen from its recent highs, but it has continued to find support whenever prices move towards US$4,300.
That resilience is one reason professional analysts remain predominantly bullish despite the recent weekly decline.
Gold’s long-term story remains bigger than one Fed meeting
The Federal Reserve’s decision may create significant short-term volatility, but gold’s long-term story extends well beyond a single interest rate announcement.
Gold has been used as money and a store of value for thousands of years.
Today, it continues to play a role in central-bank reserves, institutional portfolios and private wealth protection.
For physical gold buyers, short-term price movements can therefore be viewed differently from those of short-term traders.
Rather than attempting to predict the exact top or bottom, many physical gold buyers use periods of weakness to gradually increase their holdings.
This is the principle behind cost averaging: buying gold progressively over time rather than attempting to perfectly time the market.
The coming Federal Reserve decision could push gold sharply in either direction in the short term.
But if the current Wall Street survey is any indication, professional investors are increasingly looking beyond the next few days and towards the possibility of another major move higher.
At the time of reporting, spot gold was trading around US$4,349 an ounce.
This article is for general information only and is not financial advice. Precious metals prices can rise and fall, and past performance is not a guarantee of future results.
