Gold surprising comeback after volatile week, gold prices hold $1,750

It has been a very volatile week for gold. After dropping $30, the precious metal surged back to its very familiar territory of $1,750-$1,760 an ounce.

Gold prices hit a near two-week peak on Monday, as a weaker dollar offset bets that the U.S. Federal Reserve could begin tapering its pandemic-era asset purchases soon.

Spot gold fell 0.04% to $1758.98 per ounce by 11:50(GMT+8).

The U.S. Federal Reserve may be close to meeting the inflation mandate set for raising interest rates, Philadelphia Fed Bank President Patrick Harker said, but it may be a year or longer before the central bank’s employment goal is met to allow for an actual rate increase.

The Fed’s conditions for raising interest rates could be met by the end-2022, Cleveland Fed Bank President Loretta Mester said on Friday, adding, she expects inflation to come back down to the central bank’s target next year.

Gold is traditionally seen as an inflation hedge, although reduced central bank stimulus and interest rate hikes tend to push government bond yields up, in turn translating into a higher opportunity cost for gold that pays no interest.

Gold's bounce off a two-month low this week is creating some optimism in the marketplace as both Main Street investors and Wall Street analysts expect to see higher prices this week.

Although there is growing bullish sentiment in the marketplace in the near term, some analysts note that the market still faces fundamental headwinds of rising interest rates, an uptrend in the U.S. dollar and general apathy among generalist investors.

Christopher Vecchio, senior market strategist at DailyFX.com, said that the ongoing credit issues with Evergrande, and the debt ceiling issues in the U.S. could continue to support prices in the near term. Friday Fitch Ratings said that the U.S.'s AAA sovereign credit rating could be pressured if federal lawmakers didn't address the debt ceiling issue in a timely manner.

Despite the growing uncertainty, Vecchio said that he expects these issues to eventually be resolved.

"I would expect gold to rally as this crisis builds, but we have been here before, and when these issues are resolved, prices could fall like a brink," he said. "Given the weak price action we already see in gold, I would be inclined to fade the upside."

This week 14 Wall Street analysts participated in Kitco News' gold survey. Among the participants, seven, or 50%, called for gold prices to rise. At the same time, four analysts, or 29%, called for lower gold prices next week. Three analysts, or 21%, were neutral on gold in the near term.

Meanwhile, A total of 889 votes were cast in online Main Street polls. Of these, 430 respondents, or 48%, looked for gold to rise next week. Another 340, or 38%, said lower, while 119 voters, or 13%, were neutral.

Photo: KITCO

Sentiment had turned around sharply from the previous week when market analysts were significantly bullish. Meanwhile, bullishness among retail investors has picked up from a seven-month low.

The boost in optimism comes as gold prices are looking to close the week holding support above $1,750 an ounce, bouncing back from a two-month low seen earlier in the week. December gold futures last traded at $1,759.50 an ounce, up 0.44% from last week.

Marc Chandler, managing director at Bannockburn Global Forex, said that in the near term, gold prices have room to push to the high of $1,787 an ounce. However, he noted that sentiment in the marketplace is still poor.

"I think the U.S. interest rate adjustment went as far as it could on the current information set, and so low we saw near 1721, maybe it for a while," he said.

While some analysts are conditionally bullish on gold, others see a growing potential, especially as energy prices in Europe continue to rise out of control. According to some reports, European natural gas prices have risen to record highs this year.

"Gold is slowly disconnecting from dollar and yield strength as the inflation story becomes anything but transitory," said Ole Hansen, head of commodity strategy at Saxo Bank.

Adrian Day, president of Adrian Day Asset Management, said that he is bullish on gold as investors start to realize that with rising inflation, the Federal Reserve's plan to tighten interest rates by first reducing its monthly bond purchase is "too little too late."

"Tapering, after all, is only the reduction in the pace of buying, so the Fed's balance sheet will simply grow more slowly," he said. "But even that keeps getting pushed back. [Federal Reserve Chair] Jerome Powell, after indicating a couple of weeks ago that tapering would begin in December, now says 'the outlook is highly uncertain.' They will keep postponing as long as they can get away with it.”