Price of Gold Fundamental Weekly Forecast – Gold Rally Stalls in Reaction to Hawkish Fed Minutes

Gold prices rallied last week, matching a high reached on September 18. The week started with strong buying, but prices consolidated the next three days as investors reacted to a stabilizing U.S. Dollar. The catalyst behind the price action late in the week was upbeat U.S. economic data and hawkish Fed minutes.

For the week, February Comex Gold futures settled at $1322.30, up $13.00 or +0.99%.

The market was underpinned by expectations of a weaker U.S. Dollar this year. Driving gold higher were concerns over the number of Fed interest rate hikes in 2018. Bearish traders feel that tame inflation and the possibility of stagnant growth may lead the central bank to cut the number of planned rate hikes from three to two. Sellers also expressed doubts over the impact of the new tax reform plan on U.S. economic growth.

The Fed minutes revealed the usual divided central bank members, but they also tipped the scales toward the more hawkish FOMC members.

The Fed raised rates a quarter-point at its December meeting, with most FOMC officials backing the continued path of gradual rate hikes. According to the minutes, some Fed members were concerned about low inflation. Others thought the tight labor market and tax hikes could help boost inflation.

In other news, ISM Manufacturing PMI beat the 58.1 forecast with a read of 59.7. The ADP Non-Farm Employment Change report showed the private sector of the economy added 250K new jobs in December. Weekly Unemployment Claims, however, came in higher than expectations at 250K.

On Friday the U.S. Labor Department reported that the U.S. economy added a disappointing 148,000 jobs in December while the unemployment rate held at 4.1 percent. Economists were looking for non-farm payrolls to grow by 190,000. The total was well below the November pace of 252,000, which was revised up from the initially reported 228,000.

The bright spot in the U.S. December employment report was the rise in wage growth. Average hourly earnings rose 9 cents, or 0.3 percent, in December after gaining 0.1 percent in the prior month. This news lifted the annual increase in wages to 2.5 percent from 2.4 percent in November.

Finally, ISM Non-Manufacturing PMI came in below expectations at 55.9.

Forecast

If gold was being driven higher by concerns over whether the Fed would raise rates at least three times in 2018, then last week’s Fed minutes and U.S. jobs report could be the news that triggers the start of the first meaningful correction in almost a month.

Additionally, hawkish comments from Cleveland Fed President Loretta Mester on Friday may also tip the scales to the weak side for gold. Mester said the jobs report, which missed the estimates, was nevertheless “strong.” Mester also said she believes three to four interest rate hikes would be appropriate this year.

“I think it’s a strong report,” Mester told CNBC in a live interview from Philadelphia. “I think we’re basically at maximum employment from the view of monetary policy. But that doesn’t mean it triggers a necessary reaction.”

Mester is one of the Fed’s more hawkish members. She will also be a voting member this year on the Federal Open Market Committee.

The key level to watch this week is $1317.10. Holding this level will indicate that buyers are still coming in to support the market. This could lead to an eventual test of $1365.80. A break under this level could drive prices to $1302.10. This is another trigger point for further downside pressure.

Weakness in the gold market will not mean the trend is changing to down, but it could be an indication that investors are questioning its value at current price levels.