Gold Price Dodges a Bullet Is there a Chance For a Breakout?

( 10/21/22 - Anna Golubova )

Gold staged a solid rally Friday as markets increased bets on a slower tightening cycle from the Federal Reserve following the November meeting. Analysts are now paying close attention to next week's U.S. Q3 GDP data and earnings reports to get a better glimpse into the state of the U.S. economy.

December gold futures rallied more than $20 on the day and last traded at $1,657.80 an ounce after hitting a new two-year low and almost breaching the key support level at $1,620 earlier in the week.

The move higher was triggered by the market reexamining its rate hike expectations after The Wall Street Journal reported that the Fed would debate the size of future rate hikes following its widely-expected 75-basis-point increase in November.

"The idea that we could see the Fed debate whether or not they should downshift into a slower pace of tightening really excited investors," OANDA senior market analyst Edward Moya told Kitco News.

Prior to Friday's news, markets were looking for a 75 bps hike in November and another 75 bps in December. Now, if the Fed does debate, it could easily justify half a point shift instead in December. Plus, the U.S. economy could be starting to see the impact of the first rate hikes, Moya pointed out.

"Today's rally is impressive. Gold held the $1,620 level following a major pivot on rate hike expectations. Gold might have dodged the bullet here. Next week is critical for earnings season," he said. "A lot of market potential for volatility. I am leaning towards bullish for next week. We could probably see the idea of the Fed downshifting supported."

Moya is paying close attention to next week's third-quarter GDP data, scheduled for Thursday. Market consensus calls are looking for growth to recover to 2.1% after two negative quarters.

"The GDP data is a big wild card. We are supposed to turn positive after a streak of two bad quarters. There is a lot that could complicate what happens here. The risk now is that something is breaking for the economy," Moya noted.

From the technical perspective, gold is still in a downtrend, and the risk is tilted to the downside.

"Technically, we better hold in here, or prices could move down another 5% to $1,560, then to $1,470-80. That's what is shaping up technically," Walsh Trading co-director Sean Lusk told Kitco News. "But from a bargaining standpoint, gold saw a six-month-long washout after hitting a peak of above $2,000 an ounce back in March. When does it end? How much is enough before seeing stabilization?"

There is a risk that gold could drop another $100 before finding its bottom, Lusk warned. "The $1,620 level needs to hold near term — potential double bottom on charts. Investors have been selling into rallies. We've hit a near-term bottom, so I am bullish next week. But all bets are off going into the Fed meeting in November," he said.

Gold is in uncharted territory for the moment, said Gainesville Coins precious metals expert Everett Millman, pointing out that gold is well below some key trading levels from earlier this year.

"It will be interesting to watch how quickly those higher rates bring down inflation. Even though higher rates are negative for gold, rates as high as 5% are still below the inflation level, which means real rates are still negative. So if the Fed pivots next year, we'll see gold respond gradually," Millman told Kitco News.