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Price of Gold Fundamental Weekly Forecast – Prices Could Sink if Fed Targets First Quarter End to Tapering

By:
James Hyerczyk
Published: Dec 13, 2021, 12:39 UTC

With Fed Chair Powell’s hawkish stance likely priced into the gold market, traders need to be looking beyond a simple faster tapering.

Comex Gold

In this article:

Gold futures inched higher last week after posting a mostly two-sided trade. The price action was driven by mixed reactions to rising Treasury yields and a weaker U.S. Dollar, suggesting position-squaring ahead of this week’s U.S. Federal Reserve policy announcements.

One influence was Friday’s U.S. Consumer Price Index (CPI) report. The inflation number hit a 40-year high, but traders were looking for more convincing evidence to influence a hawkish Federal Reserve response.

Last week, February Comex gold futures settled at $1784.80, up $0.90 or +0.05%. The United States Oil Fund ETF (USO) finished at $52.01, up $0.99 or +1.94%.

Inflation Surged 6.8% in November, Even More than Expected, to Fastest Rate Since 1982

Gold futures rose on Friday, putting it higher for the week. The market was boosted by elevated U.S. consumer prices, which also cooled some bets for aggressive interest rate hikes since the jump in inflation was not as big as expected.

Inflation accelerated at its fastest pace since 1982 in November, the Labor Department said Friday, putting pressure on the economic recovery and raising the stakes for the Federal Reserve.

The consumer price index, which measures the cost of a wide-ranging basket of goods and services, rose 0.8% for the month, good for a 6.8% pace on a year over year basis and the fastest rate since June 1982.

Excluding food and energy prices, so-called core CPI was up 0.5% for the month and 4.9% from a year ago, which itself was the sharpest pickup since mid-1991.

The Dow Jones estimate was for a 6.7% annual gain for headline CPI and 4.9% for core.

Treasury Yields Climb as Investors Monitor Omicron Variant

U.S. Treasury yields rose early last week, making gold a less-attractive investment, as risk sentiment increased with investors monitoring the omicron COVID-19 variant and the Federal Reserve’s potential policy tightening.

Market expectations have grown for the Fed to zero in on combating inflation, following increasingly hawkish comments from policymakers. Meanwhile the omicron variant continued to spread according to healthcare officials with no real indication of its potential impact on the economy at this time.

Weekly Forecast

Ahead of Wednesday’s Federal Reserve monetary policy decision, investors are looking for a hawkish tone from the central bankers, which could be capping gold prices. Reduced stimulus and interest rate hikes tend to push government bond yields up, raising the opportunity cost of non-interest-bearing bullion.

That’s all fine and dandy on paper, but gold traders have known about the hawkish tone for two weeks following Fed Chairman Jerome Powell’s testimony before Congress. Powell supported the idea of a faster taper and made a dramatic shift when he said the big concern with another wave of the coronavirus or new variant was inflation, because it might keep people out of work and worsen supply constraints.

With Powell’s stance likely priced into the gold market, traders need to be looking beyond a simple faster tapering. They need to know the Fed’s timetable for ending the tapering and starting the rate hikes. It’s this news that will drive the next major move in gold.

Gold prices could spike lower if the Fed says anything to suggest the timetable of the first rate hike should be moved up to perhaps April. The tip-off will be comments that suggest the Fed aims to complete its asset purchases by the end of the first quarter.

Furthermore, bearish traders should be looking for any language that suggests the Fed will go “live” in the future. This would put it in a position to raise rates several times next year.

In order for gold to turn bullish, the Fed will have to merely suggest a faster tapering without any details. Furthermore, any suggestions that Omicron could derail the Fed’s tightening plans, is likely to be another bullish factor.

For a look at all of today’s economic events, check out our economic calendar.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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