Gold prices have continued their upward trajectory this week amid a weaker dollar and rising tensions with China. Some analysts have forecast that the yellow metal could rise to $5,000 by the end of the year. Others are increasingly worried that gold prices could turn around, at least temporarily. One factor that could have influenced that decision is the US CPI data.
US September inflation figures were scheduled to be released on Wednesday, but have been delayed due to the government shutdown. Unlike other statistical releases, the CPI figure is considered essential. Specifically, it’s needed to calculate the cost-of-living adjustment (COLA) for Social Security payments before the end of the month. So, the BLS has recalled the staff required to publish the US CPI data, but rescheduled it for November 24.
The Fed Outlook Without Data
The timing is convenient for the Fed, as it will be four days before the October FOMC meeting. For the analysts, however, it means trying to figure out what the Fed will do without having the data. Typically, inflation figures serve as a point of reference for adjusting expectations about what will happen at the next FOMC meeting. Now, expectations might remain unchanged right up until a few days before the meeting.
Over the last week or so, markets have consolidated expectations for a rate cut at the end of October, with a 95% chance of 25 bps of easing. This has allowed the dollar to settle, and lately it has turned a bit weaker. The strong market sentiment that the Fed will cut rates and keep cutting has been an important factor in supporting gold’s upward trajectory. Without new data on inflationary trends, the interest rate outlook will likely remain unchanged.
Gold to Keep Rising?
The latest push for gold has relied on increased tensions between the US and China over trade. Markets are reacting negatively to signs of escalation, with stocks falling and gold rising. But when there are signs of easing tensions, the situation doesn’t reverse. Stock prices rise, but so does gold. This indicates that traders are hedging their bets on what will happen in trade negotiations and the upcoming earnings season.
A risk-averse market is generally positive for gold. If the current situation persists, gold prices are likely to trend higher. However, there are so many separate circumstances with varying levels of uncertainty that make the outlook hard to predict. And, yet again, uncertainty is often supportive of gold.
What Are the Risks for a Correction?
There are so many factors supporting gold now that it’s logical for analysts to expect the upward trajectory to be maintained. On the other hand, it means there are many risk points that could cause a price reversal. For example, the US shutdown is seen as supportive of gold, but it could end at any time if a political agreement is reached. Other factors are more sustainable, such as China’s dedollarization, which sees its central bank consistently buying gold. On the other hand, a lack of a breakthrough in trade negotiations could leave the PBOC more focused on the domestic economy and pause its gold buying program.
From a trader’s perspective, a strong indication that gold will rise might mean markets have already priced it in. That makes money management and watching stops increasingly relevant for gold bulls. At least until the current crop of uncertainties is resolved around the end of the month.
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