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Is the Fed at peak hawkishness? Rising sentiment in gold market says yes
By: Neils Christensen | May 6, 2022

The gold market is ending its third week in negative territory. Still, bullish sentiment has improved among Wall Street analysts and retail investors as the Federal Reserve lays out its monetary policy plan through the summer.

Gold's short-term outlook among Main Street investors has improved sharply following the U.S. central bank's highly anticipated monetary policy decision. Last week bullish sentiment among retail investors fell to its lowest level in eight months.

Although a strong U.S. dollar and rising bond yields present challenging headwinds for gold, many analysts have said that these markets could see a shift in momentum. While the U.S. central bank looks to raise interest rates by another 50 basis points at the next two meetings, Federal Reserve Chair Jerome Powell pushed back on market expectations of a bigger 75-basis point move.

"I think we have reached peak hawkishness with the Federal Reserve. Other central banks will have to step up with their tightening measure," said Philip Streible, chief market strategist at Blue Line Futures. "The U.S. dollar looks a little toppy as other central banks like the [Bank of Japan] and the [European Central Bank] can't ignore inflation for much longer."

Adrian Day, president of Adrian Day Asset Management, said that he also sees monetary policy pushing gold prices higher in the near term.

"The monetary environment remains favorable, with the Fed sounding hawkish, but in reality, it is tightening too little and far too late; while the ECB is hesitant and both China and Japan are easing," he said.

Day added that the rising volatility in equity markets also supports gold's bullish outlook next week.

"Initially, when the stock market falls, it is not unusual for gold to be used as a source of liquidity, but after that, gold becomes a safe haven and insurance from falling asset prices," he said.

This week 17 Wall Street analysts participated in Kitco News' gold survey. Among the participants, six analysts, or 53%, called for gold prices to rise next week. At the same time, four analysts, or 35%, were bearish on gold in the near term, and two analysts, or 12%, were neutral on prices.

Meanwhile, 1,049 votes were cast in online Main Street polls. Of these, 637 respondents, or 61%, looked for gold to rise next week. Another 245, or 23%, said lower, while 162 voters, or 16%, were neutral in the near term.

The shift in sentiment comes as gold prices last traded at $1,883.40 an ounce, down 1.5% from last week.

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that he also is bullish on gold next week as he looks for the U.S. dollar to drop from its recent 20-year highs.

"The U.S. dollar is oversold against several paper currencies and starting to roll over, suggesting it may be starting a correction which could take some of the recent pressure off of gold," he said.

However, not all analysts are bullish on gold in the near term. Darin Newsom, President Darin Newsom Analysis said that fundamentally, there is no reason why the U.S. dollar should top out now as the Fed remains the most aggressive central bank in the global economy.

"Employment is solid and supports the economy, so the Fed has no reason to stop raising interest rates. That will continue to support the U.S. dollar," he said.

Newsome said that he does see gold prices going higher in the near term as it looks technically oversold. Still, he added, there is no fundamental reason why gold's current downtrend should end.

Sean Lusk, co-director of commercial hedging with Walsh Trading, said that he doesn't see the U.S. dollar significantly reversing course anytime soon. "In currency markets, it is the only game in town," he said. "At the end of the day, gold is in a downtrend, and I don't see that ending anytime soon."

While gold could struggle next week and test support around $1,850 an ounce, Lusk said that long-term, he remains bullish on gold.

"There is no doubt that gold will be a great trade down the road, but for now, investors need to be patient," he said.

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