Price of Gold Fundamental Weekly Forecast – Trader Focus Shifts to Friday’s Jobs Report

Gold futures closed higher last week as traders reacted to the Fed’s dovish tone after the central bank raised interest rates as expected and fears of a recession after a government report showed a slowing economy. Although the market posted its second consecutive weekly higher close, we’re most likely looking at aggressive short-covering since the Fed is likely to continue to raise rates but at a slower pace.

Last week, December Comex gold futures settled at $1781.80, up $36.50 or +2.05%.

Fed Raises Benchmark Rate; Powell Suggests Slowdown in Rate Hikes

The Federal Reserve on Wednesday hiked interest rates by 75 basis points as expected in an effort to cool the most intense breakout of inflation since the 1980s.

Fed Chair Jerome Powell also said the lack of clear visibility into the future trajectory of the economy means the central bank can provide reliable guidance about where its policy is headed only on a “meeting by meeting” basis.

In the absence of clear guidance from Powell, traders interpreted his comments as dovish since he didn’t reiterate his previous hawkish comments about raising rates aggressively to combat inflation.

US GDP Slows During Second Quarter

Data showed on Thursday that U.S. gross domestic product fell at a 0.9% annualized rate in the second quarter. Consumer spending grew at its slowest pace in two years and business spending contracted, raising the risk that the economy was on the cusp of a recession. Economists polled by Reuters had forecast GDP rebounding at a 0.5% rate.

US Economic Data Shows Red-Hot Inflation

On Friday the Bureau of Economic Analysis reported that the Personal Consumption Expenditures (PCE) price index, an inflation indicator closely watched by the Fed, rose 6.8% from a year ago in June, hitting its highest level since January 1982.

The PCE jumped 1.0% last month, the largest increase since September 2005 and followed a 0.6% gain in May. Excluding the volatile food and energy components, the PCE price index shot up 0.6% after climbing 0.3% in May.

In other economic news, U.S. consumers lowered their views of where inflation is headed in July, a closely watched survey showed on Friday, a downshift in expectations that will be welcome news at the Federal Reserve in its battle with the highest inflation rate in four decades.

Weekly Outlook

Gold traders are acting as if Powell specifically said he was going to slowdown the pace of interest rate hikes (he didn’t). He actually said he didn’t see the country in a recession. Investors are also acting like they saw strong evidence that the country was headed toward recession (there wasn’t any).

Officially, the price action suggests gold traders think growth will slow enough to stop the Fed from hiking beyond December and perhaps even enough to prompt rate cuts early next year.

However, it’s going to take a lot more than a weak GDP report to hurt the economy. It’s going to take a weaker labor market. Until the labor market starts to show signs of weakening, the Fed is likely to continue to raise rates at a slow and steady pace, and that means we’re still in “sell the rally” mode.

Looking ahead, this week’s key reports that could confirm or reject the idea the economy is headed into recession include ISM Manufacturing PMI, the JOLTS Job Openings, ISM Services PMI and the Non-Farm Payrolls report.