Gold Price Fundamental Daily Forecast – Market’s Terminal Rate Expectations Indicate More Weakness

Gold futures fell to their lowest level since September 28 and within striking distance of a more than 2-1/2 low on Friday before settling sharply lower. Closing near the bottom of the trading range suggests the market may be poised for further downside action early next week.

The fundamentals driving the price action are pretty clear. Stubbornly high inflation is forcing the Federal Reserve to raise interest rates aggressively. This is driving up U.S. Treasury yields and consequently the U.S. Dollar.

On Friday, December Comex gold futures settled at $1648.90, down $28.10 or -1.70%. Additionally, the SPDR Gold Shares ETF (GLD) finished at $152.98, down $1.93 or -1.25%.

Gold is a dollar denominated asset so when the greenback rises, it becomes more expensive to holders of foreign currencies, driving down demand.

Another way to look at it is to think of gold as an asset that pays no dividend nor interest. With yields rising, investors are selling their investments in gold and placing their proceeds in higher-yielding U.S. financial instruments.

In other words, who wants to hold a non-yielding asset during a rising interest rate environment?

Economic Reports Set the Bearish Tone

After a few days of consolidation, gold prices took a hit on Thursday and Friday after U.S. economic data cemented the chances of a super-sized rate hike by the Federal Reserve at its November 1-2 monetary policy meeting.

Data released by the U.S. Labor Department on Thursday had showed consumer prices in the U.S. rose by more than expected in September, raising concerns about the outlook for interest rates. The data showed the Consumer Price Index (CPI) rose by 0.4% in September after inching up by 0.1% in August. Economists had expected consumer prices to edge up by 0.2%.

Economic news released on Friday also triggered a steep break in gold prices. A report from the University of Michigan showed a rebound in inflation expectations in the month of October. One-year inflation expectations climbed to 5.1% in October after dropping to a one-year low of 4.7% in September, while five-year inflation expectations increased to 2.9% in October after falling to 2.7% in September.

Short-Term Outlook

There was nothing in Friday’s price action to suggest gold futures are near a bottom. Based on the downside momentum into the close, prices are likely to remain under pressure early next week with the short-term target ranging from $1622.20 to $1609.30. I wouldn’t be surprised if we see a $1500.00 handle sometime next week.

If you want to know where gold prices are going then keep watching market data on Federal Reserve rate hike expectations. Higher rate expectations mean lower gold prices.

As of Friday’s close, the market had priced in nearly a 100% chance of another 75-basis point rate hike in November. On Thursday, the market had also priced in an 11.3% probability that the Fed would raise rates by a supersized 100 basis points when policymakers announce their rate hike decision on November 2. However, those odds fell to 0% by Friday’s close.

The most bearish indicator for gold prices is the jump in the Fed’s terminal rate, or the level at which the market expects rates to peak.

As of the Fed’s last meeting in late September, the terminal rate was sitting at about 3%-3.25% from near zero in March. As of Friday’s close, money markets now see the Fed Funds rate at 4.95% in March 2023. That’s enough to keep a cap on gold prices and send it sharply lower over the near-term.