Gold: Buyers to be cautious ahead of crucial events and data

Next week, not only gold investors but all the financial market participants are likely to exercise caution ahead of three key events: the Federal Reserve’s monetary policy decision due on the 14th, the European Central Bank’s Monetary policy decision due on the 15th, and Bank of England’s monetary policy decision due on 15th.

In addition, prudence is warranted ahead of crucial US CPI data (November) due on the 13th, too. All three central banks are expected to hike rates by 50 bps each.

Gold finished the week ending on November 9 almost unchanged at $1797.26, which is a sign of strength considering that the US 10-year yields at 3.584% were up 2.63% on the week, and the US Dollar Index gained 0.38% to close at 104.90.

Gold held well despite the US ISM services (November reading came in at 56.50 as against the forecast of 53.30), factory orders ( October reading stood at 1% vs the forecast of 0.70% and PPI (core

November reading recorded at 6.2% y-o-y Vs the forecast of 5.90%; headline inflation at 7.40% Vs the forecast of 7.20%) data topping the forecast.

The performance of gold reflects strength as the metal held on its own despite Brent oil falling over 10% in the week. Nonetheless, investors will be cautious in the wake of the upcoming data and the scheduled events.

Although FOMC doing a 50-bps hike in December is a no-brainer, markets may be anxious about the Fed’s interest rate decision in its January 2023 meeting as the financial conditions have loosened since September.

Moreover, robust non-farm payroll and ISM services reports and hotter than expected PPI data may force the Federal Reserve to adopt a much more hawkish stance and resolve for their monetary policy going forward.

It is to be noted that the Index for final demand services advanced 0.40% in November after rising 0.1% in October. Similarly, food prices also jumped last month.

A rise in PPI despite a steep decline in energy prices will be a disconcerting factor for the US Federal Reserve.

We expect hawkish commentary from the US Fed next week. Markets may have gotten somewhat ahead of themselves in anticipating a dovish Federal Reserve and peak inflation.

Gold may decline next week unless both FOMC and CPI turn out to be in favor of the buyers.

Support is seen at $1750, followed by $1730. The next major supply zone after $1805-$1810 region is $1840-$1850.

(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas)