Gold: We are Not Messing AroundIf you read last week's post, "Is the Top in on Gold?," you will know I was preparing for a correction, which played out perfectly. Gold futures could work their way lower from here, given the amount of premium pumped into the market from the October 6th lows until the October 27th highs (+ $196.20). The Hezbollah leader already discredited widespread escalation on November 3rd that triggered an exodus of those fortunately enough to capture the previous upward move.
A Hawkish Fed
From the October 27th highs until this week's lows, we have only seen 1/3 of the rally retraced. Given last week's softer Non-Farm Payroll data and the correction in 10-year Treasury yields (40 bps), I expect the "floor" on Gold prices to be well above the October lows—most likely in the low $1900s, high $1800s. How do we get there? Fed Chairman Jerome Powell said Thursday the Fed "is not confident it has done enough to bring inflation down." In layman's terms, "We are not messing around," and that "hawkish narrative" drives Gold down there.
The CME FedWatch Tool
Looking at the CME FedWatch Tool, expectations for a December rate hike surged from 4.8% last week to 14.6% after Powell's comments. Is he "all bark, no bite," let's be serious: economic data is declining, and credit is tightening. Can he raise it one more time? Sure, but what is he accomplishing? The softening data continues into mid-2024, when the Fed should make its first interest rate cut and end 2024 at 4.55%. I expect lower Gold prices in the near term, followed by another "leg" higher into the end of the year and 2024.
Taking It to the Charts
Gold futures have technically disappointed after breaking the 200 (DMA) at $1983 and continue to work lower. The next support zone is $1950 down to $1936, where a close below $1936 could spark additional selling back down to our "value area" $1910-1885. While we do not see Gold challenging the October lows, much depends on the pace of a ceasefire, Fed interest rate decisions, and investor sentiment. We saw capital inflows into Precious Metals over the past three weeks, but that capital is quick to move to other asset classes, such as the Nasdaq, Bitcoin, or "risk-free" Treasury products.
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