Weekly Gold Review: FED minutes and data embolden bears, gold price poised for four consecutive declines

Spot gold prices fell to a new low of $1884.93 per ounce, the lowest since March 13, amid concerns that the Federal Reserve will maintain higher interest rates for a longer period, almost certainly marking a fourth consecutive weekly decline. As of press time, spot gold is down 1.02% to $1894.16 per ounce. The Federal Reserve's July policy meeting minutes left the door open for further interest rate hikes, and data this week showed resilience in the US economy, reinforcing the view that rates will remain high for some time. Economists have lowered their forecasts for a US recession this year and are increasingly leaning toward the view that the Fed can engineer a soft landing. The US dollar index is expected to post a fifth consecutive weekly gain this week, its longest winning streak in 15 months, as the resilience of the US economy justifies maintaining high interest rates for a longer period. Investors are looking to Federal Reserve Chairman Powell's speech at the Jackson Hole central bank annual meeting next week for more clues on the outlook for monetary policy. Fed Minutes: Leaning Toward Further Rate Hikes The Federal Reserve's July policy meeting minutes showed that most policymakers continue to believe that "inflation faces significant upside risks," suggesting that the Fed is leaning toward further interest rate hikes. Strong economic data released this week in the US, particularly retail sales data, has provided support for further tightening of policy. These factors pushed the 10-year US Treasury yield to its highest level since October at 4.328%. IG market strategist Yeap Jun Rong said: "...So far, US economic data has provided room for interest rates to remain high for an extended period, and US retail sales data has offset concerns about a recession and may curb safe-haven flows into gold." Most economists believe that the Fed's rate hike cycle is likely over, given the recent moderation in inflation, but the possibility of a rate hike at the October 31-November 1 policy meeting cannot be ruled out. Federal Reserve Chairman Powell's speech at the Jackson Hole economic symposium next week may provide more clues on the outlook for monetary policy. Indeed, some key price indicators have shown stubborn persistence for a long time. The personal consumption expenditures price index excluding food and energy remains above 4%—well above the 2% target. Some policymakers see this as evidence of the slow return to the inflation target. But so far, inflation has not caused significant damage to the job market or economic output. A growing number of economists—including the Fed's own staff—predict that the US will avoid a recession. Federal Reserve Governor Waller explained: The pandemic lockdowns put so much extreme pressure on the economy that simply returning to normal (such as demand for workers) could cool price increases without causing much damage to employment or economic growth. Brent Meyer, assistant vice president and chief inflation watcher at the Federal Reserve Bank of Atlanta, said in a report that the path to 2% inflation may actually be flat, rather than fraught with setbacks and difficult choices as many had previously predicted. Tim Waterer, chief market analyst at KCM Trade, said: "...The dollar needs to turn bearish at some point for gold to rediscover its magic. How long gold will trade below $1900 will depend on how long high bond yields continue to support the dollar." No Shortage of Cautious Views However, it appears that more participants are becoming cautious about continued monetary tightening. "Some participants" noted that excessively high interest rates pose risks to the economy. This suggests that divergence of opinion within the Fed has widened as policymakers weigh evidence that inflation is falling and assess potential damage. Raising interest rates above what is necessary will affect employment and economic growth. While participants "emphasized" that disinflation needs to continue to make progress to align with the Fed's 2% target, they also "cited some early signs, from slowing housing inflation to lower inflation expectations, suggesting that inflationary pressures may be easing." Matt Simpson, senior analyst at City Index, said: "While the FOMC minutes are positive for further strengthening of the dollar and yields, putting pressure on gold, there are initial signs of stabilization in spot gold prices today. Given that US Treasury yields and the US dollar index are hovering near key volatility highs, I think the market is approaching a potential turning point." Economists at ANZ Bank noted that strong economic data demonstrates the resilience of the US economy, and the market has ruled out the possibility of a hard landing, reducing the safe-haven demand for gold. Their baseline forecast is for rates to remain at current levels, but they do not rule out the possibility of another rate hike depending on the data. In any case, real interest rates are likely to rise as inflation slows. Overall, they believe gold faces headwinds in the short term. However, they remain positive on the medium-to-long-term outlook for gold, projecting a target level of $2100 by the end of the first quarter of 2024. The Fed Takes a More Patient Approach Overall, Federal Reserve policymakers agree that the level of uncertainty remains high, and future interest rate decisions will depend on the "overall" data released in "the coming months" to "help clarify the degree of uncertainty that the disinflation process is continuing." This may indicate a more patient approach to further increases in borrowing costs. Given the progress the Fed has already made in lowering inflation and the lack of a significant rise in unemployment, they are indeed in an "unprecedented" phase, but this is good news for officials who hope to bring inflation back to the 2% target without imposing a heavy cost on workers. Goldman Sachs took a dovish stance on the outlook for Fed policy in its latest analysis report released last weekend, predicting that the Fed will not raise interest rates further and expects the Fed to begin cutting rates from the second quarter of 2024. A report from the National Australia Bank's commodity research department stated: "We expect gold prices to continue to fluctuate as the market continues to react to the Fed's minutes." But they added that a rise in gold prices may require an increase in expectations for rate cuts in 2024.

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