Weekly Gold Review: Gold price plunges over $30 from its high after briefly touching $1800! Fed minutes hawkish, 'horror data' takes effect

The gold market experienced significant volatility this week. Driven by stronger-than-expected US inflation data, gold prices surged on Wednesday (October 13th) and briefly touched the $1800 per ounce mark on Thursday. However, pressured by the hawkish minutes from the Federal Reserve meeting and strong US retail sales data, gold prices took a sharp dive, falling below $1770 per ounce by the end of the week.

Spot gold closed at $1767.39 per ounce this week, reaching a high of $1800.49 and a low of $1749.99. Spot gold rose $10.38 or 0.59% this week.

IMF report boosts gold prices early in the week

Due to the International Monetary Fund (IMF) lowering its global growth forecast, gold attracted some safe-haven buying, rebounding on Tuesday after softening the previous trading day.

Prominent financial website Marketwatch reported that gold prices closed higher on Tuesday after the IMF said the global economy was losing momentum.

The IMF lowered its forecast for global economic growth after it "saw severe supply disruptions around the world also exacerbating inflationary pressures, which are quite high, and financial risks are increasing, adding further risks to the outlook".

In its World Economic Outlook report on Tuesday, the IMF projected global economic growth of 5.9% this year, down from a previous forecast of 6%. The IMF also projected that global economic growth will slow to 4.9% in 2022 and lowered its forecast for US economic growth this year by 1% to 6%.

AvaTrade analyst Naeem Aslam pointed out that the IMF report weakened the outlook for the US economy, relatively increasing the attractiveness of gold, but major buying support has not yet been seen.

Brien Lundin, editor of the Gold Newsletter, said that any news of economic slowdown is usually good for gold, suggesting that central banks will adopt further loose monetary policies.

Daniel Briesemann, an analyst at Commerzbank, said, "Increased market risk aversion, coupled with concerns about inflation and a global economic slowdown, has benefited gold."

Briesemann said that if discussions about stagflation intensify, gold prices could rise to $1900 by the end of the year, as interest rates should remain relatively low even if the Fed begins to reduce bond purchases.

US inflation data drives surge in gold prices

On Wednesday, gold prices jumped over $30 to above $1790 per ounce, supported by a decline in the dollar and concerns that high inflation could hurt global economic growth.

Data released by the US on Wednesday showed that the US Consumer Price Index (CPI) rose 0.4% in September, compared to market expectations of 0.3%. Excluding volatile food and energy components, the core CPI rose 0.2% in September, compared to 0.1% in August, the smallest increase in six months.

The US CPI rose 5.4% year-on-year in September, exceeding 5% for the fifth consecutive month and marking the largest annual increase since 2008. Economists had previously forecast a 5.3% year-on-year increase in the US CPI for September.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that the US CPI report showed continued inflationary pressures, and gold, as a hard currency, has historically been seen by investors as a hedge against inflation.

Cieszynski said: "Wage inflation and price inflation are rising, and gold's role as an inflation hedge has returned to its most important position." Cieszynski said that the weakening dollar also helped gold's performance.

Daniel Pavilonis, senior market strategist at RJO Futures, said: "The current situation is that gold is an inflation metal and should rise."

Lukman Otunuga, an analyst at FXTM, said: "Given that discussions about stagflation continue to dampen global sentiment and fuel risk aversion, this could provide support for gold investors."

Edward Moya, senior market analyst at brokerage OANDA, said in a report that inflation expectations intertwined with global growth concerns are worrying many investors that corporate and consumer spending will weaken significantly in the second half of 2022. Safe-haven funds are starting to flow into gold.

Chintan Karnani, head of research at Insignia Consultants, said: "The rise in gold prices is mainly due to the expectation that inflation will continue to rise in the fourth quarter. Central banks' tolerance for malignant inflation will be tested this quarter."

Jim Wyckoff, senior analyst at Kitco Metals, said: "Traders and investors are finally realizing that historically, rising inflation has been good for metals, regardless of what the Fed does." Wyckoff added that further volatility in the stock market this month could also trigger safe-haven demand for gold.

David Meger, head of metals trading at High Ridge Futures, said: "We've seen support from the general idea that inflationary pressures will be enough to support gold in an environment where we see the Fed slowly shifting to reducing asset purchases."

Fed minutes turn hawkish

The minutes of the Federal Open Market Committee (FOMC) meeting of September 21-22, released on Wednesday, showed that participants believed that the Fed was close to achieving its economic goals and could soon begin policy normalization by slowing the pace of monthly asset purchases. Most officials agreed that a gradual reduction in the bond-buying program could begin in mid-November or mid-December and could end by mid-2022.

Fed officials hinted last month that they were about to begin reducing their $120 billion in monthly asset purchases. Fed Chairman Powell told reporters that the process could begin as early as November and end around mid-2022. The minutes showed that Fed officials face high uncertainty on both their mandates of achieving full employment and price stability.

Fed officials discussed the specific path of tapering: reducing the amount of monthly asset purchases, with a $10 billion reduction in Treasury purchases and a $5 billion reduction in mortgage-backed securities purchases.

Earlier this week, Fed Vice Chairman Richard Clarida said that the economic fundamentals of the recovery from the COVID-19 pandemic had reached the necessary standards to announce a reduction in bond purchases.

Oanda analyst Naeem Aslam believes that as investors expect the Fed to start reducing bond purchases this year, Treasury yields will surge, and gold's momentum is unlikely to support a significant rise.

Jason Schenker, president of Prestige Economics, said: "We still believe that the Fed will announce the planned quantitative easing (QE) reduction on November 3." He also said that he expects the Fed to raise interest rates next year.

"Terrible data" causes gold prices to plummet from a high point

Gold prices plummeted on Friday, pressured by strong US retail sales data. Spot gold closed at $1767.39 an ounce, down sharply by $28.21 or 1.57%, hitting an intraday low of $1764.69. US retail sales data is known as "terror data" because it usually has a significant impact on financial markets.

Data released by the US Department of Commerce on Friday showed that US retail sales rose 0.7% month-on-month in September, far exceeding the expected decline of 0.2%. The stronger-than-expected US retail sales data suggests that the Federal Reserve may take more aggressive action in reducing bond purchases or raising interest rates, putting pressure on gold prices.

In September, 11 of 13 retail categories showed growth. Sales at sporting goods and hobby stores increased by 3.7% and 2%, respectively.

Ed Moya, an analyst at online trading platform OANDA, said, "Gold failed to hold the $1800 level after better-than-expected retail sales data and a strong round of corporate earnings reports pushed US Treasury yields higher, reducing the appeal of non-interest-bearing assets."

Moya noted that after gold surged to $1800, the time for profit-taking had come, "If Wall Street continues to push up the stock market, the downward trend in gold prices may expand."

How will gold prices perform next week?

On Friday (October 15), according to Kitco's weekly gold survey, after rising to $1800 this week, Wall Street analysts have yet to decide on the next direction for gold prices, while the general public remains bullish.

After surging $40 mid-week on stronger-than-expected inflation data, gold failed to sustain a break above the key psychological level of $1800, triggering a new round of selling.

Kitco's gold survey showed that among the 13 Wall Street analysts surveyed, the number of those bullish and bearish on gold prices next week was evenly split: 38.5% bullish, 38.5% bearish, and 23% neutral.

The general public's attitude was more firmly optimistic. Among the 1425 retail investors who participated, 68% were bullish on next week's price, 19% were bearish, and 13% were neutral. This week's survey participation rate also hit its highest level since mid-June.

Adrian Day, president of Adrian Day Asset Management, said: "We will continue to experience this up and down until the market realizes that any tightening measures launched by the Fed and other major central banks are too little, too late. It's hard to say when this will happen, but when it does, gold prices will rise sharply, and the longer it takes, the more volatile it will be."

Marc Chandler, managing director of Bannockburn Global Forex, noted that the market currently expects the Fed to likely raise interest rates in the second half of next year, earlier than previously expected.

Chandler said: "I remain bearish on gold. This sharp rebound surprised me, but it has retreated from the 200-day moving average and the $1800 area. The pre-weekend sell-off triggered by the jump in US interest rates offset the bullish momentum of the rally."

Independent analyst Ross Norman called the gold price rally "constructive," but it must break through key technical resistance levels around $1800 and $1835 an ounce to rise sharply again.

TD Securities said in a report that while "heightened focus on Fed tapering overlooks rising stagflation risks," this has not yet translated into additional gold demand. However, as the energy crisis intensifies, the reasons for holding gold are "increasingly compelling."

Key US data to watch next week includes: US capacity utilization and industrial production on Monday; US building permits and housing starts on Tuesday; US initial jobless claims, Philadelphia Fed manufacturing index, and existing home sales on Thursday; and US manufacturing PMI on Friday.