Is Fed making a mistake? Big market risk ahead as gold looks to $1,900 – analysts
Anna Golubova
Friday November 19, 2021 16:28 (Kitco News) According to analysts, with all eyes on the U.S. President Joe Biden's Federal Reserve Chair pick, gold is waiting for its next catalyst to take it to $1,900 an ounce, with markets eyeing year-end volatility.
Gold is wrapping up this trading week down 1%, with December Comex gold futures last trading at $1,848.60, down 0.69% on the day.
One of the main events the market is watching very closely is Biden's Fed Chair pick, which could be announced as soon as this weekend. According to PredictIt.org, the current Fed Chair Jerome Powell is leading the race, with Federal Reserve Governor Lael Brainard in the second top spot.
"Looking to next week, we are going to get Biden's decision. Two months ago, Powell was the likely choice. But we got the trading scandal among Fed members and progressives got upset with how Powell handled the regulatory side," OANDA senior market analyst Edward Moya told Kitco News. "Now, it seems that Powell's renomination might not be a foregone confusion. If we do get a surprise and Brainard becomes the next Fed Chair, it will have a dramatic shift in short-term yields. That's a big risk ahead. Key factor what happens with yields early next week."
If Biden were to choose Brainard, gold would climb higher as the initial reaction would see those Fed rate hike expectations pushed back even further, Moya explained. However, if Powell is renominated, it doesn't necessarily mean gold would sell off dramatically. "Risk is still to the upside," he said.
Choosing Brainard will represent uncertainty for the markets, said Pepperstone's head of research Chris Weston.
"As the well-used term goes, markets hate uncertainty – and a Brainard appointment, at a time of impending monetary policy change, represents a small rise in uncertainty that many in the market could do without – well, except for those who like volatility which is most short-term traders," Weston said. "Still, my base case is we are headed into a period of higher volatility regardless, with a wild December ahead of us. Where we see the U.S. Treasury exhausting measures by mid-December and the U.S. debt ceiling potentially becoming problematic, just as the FOMC meeting sees the central bank likely announce they are accelerating the pace of tapering from $15b to $20-$25b."
Next week's other potential hurdle is holiday trading, with markets winding down to celebrate the U.S. Thanksgiving holiday. "Trading activity will be thin, and we could have some exaggerated moves here. We are not going to see any new trends emerge next week unless we get the Brainard surprise. Otherwise, gold could be stuck in that consolidation pattern," Moya said.
Gold will see choppy trading as the market tries to determine how dovish the Fed will end up being next year as inflation pressures build, he added.
"The price action is pretty much warranted to be choppy whether we wait to see whether or not the Fed will have to bow to inflationary pressures. Waiting for next few months of pricing reports to get a better handle on it," Moya noted. "Until we have a firmer handle on what the near-term outlook is for the central bank, it will be a choppy environment for gold."
Any pullback in gold price is likely to be viewed as a buying opportunity. "While headwinds could re-emerge, downside risks to growth, plus elevated inflation and our expectations for the USD to weaken and real yields to remain deeply negative, suggest price dips are likely to be viewed as good buying opportunities," said Standard Chartered precious metal analyst Suko Cooper.
If gold drops below $1,840 an ounce next week, the precious metal could be at risk of a further selloff, said strategists at TD Securities.
"The yellow metal [is] vulnerable to a deeper consolidation if prices fail to hold above the $1,840/oz region. After all, while the yellow metal remains an ideal hedge against rising stagflationary winds, the tug-of-war between high inflation prints and market pricing for central bank hikes hasn't definitively concluded," they wrote.
Next week, gold is likely to remain between $1,840 and $1,890 an ounce, Moya said. "I would not be surprised if we tested the $1,890 area and came back to where we are right now. If we see some broader weakness on gold, there should be fairly strong support at $1,840-$1,850."
Also, bitcoin below $60,000 might be good news for gold. "Risk of further weakness for bitcoin is still there. If we do see another decline in bitcoin, that in itself could be great news for gold," Moya noted.
As 2021 wraps up, traders will shift their attention away from rate hikes and focus more on growth. "The Fed could be making a mistake in removing this monetary accommodation. That's a big risk. Leading up to January, the inflation report will be a big one. Gold should see strong support here," Moya stated.
Over the next month, gold is bound to make a move to $1,900 an ounce as investors come back to bullion for inflation hedges amid a flight to safety with some additional concerns coming from Europe's COVID flare-up and the dovish European Central Bank. "Gold will see some underlying support there. And the holiday season will provide some underlying support," Moya added.
On the radar next week
The big day to watch next week is Wednesday, with the FOMC meeting minutes, the U.S. GDP release, personal spending, durable goods, PCE price index, and new home sales all scheduled to be released.
"The Thanksgiving holiday in the U.S. means a short week with the data flow concentrated on Wednesday. The highlight may well be the minutes to the November 3rd FOMC meeting when the Federal Reserve announced the start of QE tapering," said ING chief international economist James Knightley. "In terms of the data, we expect a modest upward revision to 3Q GDP growth, but the October personal spending will be more significant as it tells us how the fourth quarter started."
Bell, Book, and Bubble - The Vaccinated, the Cured, and the Dead . . . .
Bumpers by J:D
"What we see at present is a battle between the central banks and the collapse of the financial system fought on two fronts. On one front, the central banks preside over the creation of additional liquidity for the financial system in order to hold back the tide of debt defaults that would otherwise occur. On the other, they incite investment banks and other willing parties to bet against a rise in the prices of gold, oil, base metals, soft commodities, or anything else that might be deemed an indicator of inherent value.
Their objective is to deprive the independent observer of any reliable benchmark against which to measure the eroding value, not only of the U.S. dollar, but of all fiat currencies. Equally, their actions seek to deny the investor the opportunity to hedge against the fragility of the financial system by switching into a freely traded market for non-financial assets."
Peter Warburton, The Debasement of World Currency, April 9, 2001 [with gold at $259 per oz.]
"And then, Wall Street blew up the global economy. Empowered by bank deregulation and regulatory capture, Wall Street enlisted those tough-minded men of the media again to sell the world on the idea that financial innovations were making the global economy more stable by the minute. Central banks puffed an asset bubble like the world had never seen before, even if every journalist worth his byline was obliged to deny its existence until it was too late...
If economists— and journalists, and bankers, and bond analysts, and accountants— don’t pay some price for egregious and repeated misrepresentations of reality, then markets aren’t efficient after all."
Thomas Frank, Too Smart to Fail, March 2012
"The business model of Wall Street is fraud. Wall Street won’t change until we make it clear that no bank is too big to fail and no CEO is too big to jail. Billionaires and Wall Street should not be buying elections. The reason that Congress isn’t doing what the overwhelming majority of Americans wants has everything to do with the power of the monied interests. Let us bring our people together to take on and defeat a ruling class whose greed is destroying our nation.”
Bernie Sanders, September 22, 2016
"After a sustained advance in an asset class's price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
Bad valuation methodologies drive out good valuation methodologies.
Rapid growth of a new financial product that is not understood.
When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble."
Doug Kass, Ten Laws of Stock Market Bubbles, November 11, 2013
“The worst crimes were dared by a few, willed by more, and tolerated by all.”
Tacitus
Today is the 58th anniversary of the public execution of John F. Kennedy in Dallas Texas.
Whip-saw!
Biden took the path of least resistance, and nominated Jay Powell again as Fed Chairman.
He threw his party a bone by nominating Lael Brainard as Vice-chair.
Stocks took off and almost achieved escape velocity, based on some fantasy that Powell is pledging to be more hawkish.
But alas, as the initial front running euphoria waned, stocks crashed back down to earth again and left a crater as well.
The Dollar jumped to the middle of the 96 handle as well, based on the same assumption of rate increases to come.
Gold and silver were just brutally hammered lower.
How fitting since tomorrow is the most significant gold and silver futures contract option expiration on the Comex.
Never waste an opportunity.
Today the German health minister Jens Spahn said that 'probably by the end of this winter pretty much everyone in Germany — as has sometimes been cynically put — will be vaccinated, cured or dead.'
The US today has issued an advisory against travel to Germany.
Déjà vu all over again.
Who could have seen it coming?
"O Jerusalem, Jerusalem, you who murder your prophets, and persecute those whom God has sent as messengers to you. As you have willed, your house is now yours— but is made desolate."
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