Gold Defends $4,000 After Bounce as Fed Signals Take Center Stage

This past week has seen the fundamental picture improve on the interest-rate side for gold, but the coming Federal Reserve meeting does leave that improvement open to a challenge.

Real Yields

The 10-year real yield stood at 2.64% by the end of the day on Thursday. As we head into the Friday session, that is down 10 basis points in 1 week, which does reduce one competing return available to investors considering a non-interest-bearing asset such as gold. It supports a more constructive interpretation of gold’s monetary backdrop.

The same real yield initially climbed to 2.8% on Monday before reversing by Thursday, producing a 12-basis-point daily decline. Nominal 10-year yields also finished Thursday below the previous Friday, at 4.96% against 5.09%.

For gold, lower real yields can reduce the opportunity cost of holding bullion. However, this will vary with currency movements, liquidity needs, and demand for protection. Treasury figures alone do not necessarily establish that investors have bought gold, and it certainly does not look like that on the charts, or that the U.S. dollar has weakened, or that a particular catalyst caused a metals rally. In fact, we have seen the opposite.

The labor market release on Thursday offered a bit of a mixed economic signal. Initial unemployment claims fell to a seasonally adjusted 194,000 for the week ending October 17, from a revised 200,000. Continuing claims covering the earlier week ending October 10 rose by 25,000 to 1.728 million. Fewer new applications suggest limited immediate layoffs, while the increase in continuing claims warrants attention to how quickly unemployed workers can find new jobs.

Inflation Continues to Be an Issue

Inflation remains an important restraint on a straightforward easing narrative. September CPI, published on October 14, rose 0.6% month over month on a seasonally adjusted basis and 3.7% year over year before seasonal adjustment. Final-demand PPI, released on the 15th, increased 1.3% monthly and 6.3% annually. The previous week’s releases carried into this week’s policy debate, but they are not fresh announcements.

Inflation certainly leaves gold facing two competing forces. Concern about purchasing power gives gold potential strength via interest and monetary protection, but persistent price pressure can also encourage restrictive policy coming out of the Federal Reserve and offer higher real returns on bonds. The latter of the two circumstances has been what we have been seeing. The question is, can it turn around?

Next week, we get the FOMC meeting on October 27 and 28. The decision is scheduled for Wednesday, October 28, at 2 p.m. Eastern, followed by a press conference at 2:30 p.m. Both the decision and the explanation deserve attention. That being said, the FedWatch tool does not suggest that the Federal Reserve is likely to raise rates. This one will be more about the statement and the press conference, as traders are betting that December will see a quarter-point interest-rate hike.

Upcoming Announcements

There are a couple of announcements this week that I will be watching. The BEA schedules an advance third-quarter GDP estimate and September personal income and outlays for Thursday, October 29, at 8:30 a.m. Eastern. The latter of the two contains PCE inflation, which is one of the favored tools of the Federal Reserve to measure inflation.

Friday, October 30, adds the third-quarter employment cost index at 8:30 a.m. Eastern. This offers another check on compensation pressures, but is not necessarily considered to be a major announcement. The mix of all of these reports could come into the picture to give us a little bit of clarity, but by the end of the week, it is likely going to be all about the Federal Reserve press conference.

The Technical Setup for Gold Is Interesting

The technical setup for gold is interesting, as we tested the $4,000 level on Friday and bounced slightly. If we give up the $4,000 level and sellers continue to pressure this market downward, that could be a major breach of massive support. In that environment, it would not surprise me at all to see a flushing effect as gold tumbles quite rapidly.

On the other hand, staying between $4,000 and $4,200 does make a certain amount of sense between now and the FOMC press conference.