(Kitco News) - Despite failing to stage a breakout rally after cooler inflation data, gold is still looking to close Friday with its fourth consecutive weekly gain. However, Wall Street remains split on the precious metal's direction next week.
The slowdown in inflation was the main message from this week's macro data. Yet, Federal Reserve speakers continued to push back against the idea of a potential Fed pivot.
The U.S. Consumer Price Index (CPI) came in at 8.5% in July and was lower than the market expectation of 8.7%, following June's 9.1% annual gain. Core inflation, which strips out volatile food and energy costs, accelerated 5.9% from a year ago, surprising slightly on the downside but maintaining the same pace as in June.
On top of that, U.S. Producer Price Index (PPI) rose more slowly in July, coming in at 9.8% on an annual basis versus the expected 10.4%.
Nevertheless, despite signs of cooling inflation, the Fed remains resolute in its tightening path. The U.S. central bank is "far, far away from declaring victory" on inflation, said Minneapolis Federal Reserve Bank President Neel Kashkari at the Aspen Ideas Conference this week.
"[I haven't] seen anything that changes" the need to raise the rates to 3.9% by year-end and to 4.4% by the end of 2023, Kashkari added. The fed's funds rate is currently in the 2.25%-2.5% range.
San Francisco Fed President Mary Daly also said in an interview with the Financial Times this week that it is far too early to "declare victory" against inflation.
In response, gold gained, but it failed to breakout significantly above the $1,800 an ounce level as many bulls were anticipating. At the time of writing, December Comex gold futures were trading at $1,813.60 an ounce, up 1.3% on the week.
Survey results
Kitco's weekly gold survey results revealed that Wall Street is now evenly split regarding which direction gold prices will go next week. Out of 11 analysts participating in the survey, only 9% were neutral, 45.5% projected higher prices, and the other 45.5% called for gold to head lower.
The Main Street side remained bullish for next week. Out of 216 retail participants, 42.1% expected higher prices, 28.7% called for a move lower, and 29.2% remained neutral, Kitco's survey showed.
Wall Street
45.5%
45.5%VS
Main Street
42.1%28.7%Key drivers
The U.S. dollar is likely to weigh on gold next week as the greenback rebounds, according to analysts.
"Gold has spent the last few days knocking on $1,800. The momentum indicators give scope for a bit more upside, but I favor lower as I expect the USD to recover next week as retail sales and industrial production gains should be consistent with 2.0%-2.5% growth in Q2 after contracting in Q1 and Q2," Bannockburn Global Forex managing director Marc Chandler told Kitco News. "I see initial support in the $1,765 area. A break of $1,750 would likely force some of the late longs out."
Fed officials are playing a central role in containing gold's momentum, said Forexlive.com chief currency strategist Adam Button. "There's been some good momentum, but the bond market is flashing some skepticism about falling inflation, and Fed officials are likely to push back on market-implied rates well-below 4% next year."
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Even the bullish analysts for next week were cautious when making the call.
"It's a tough call this week. December gold's daily chart shows the contract to be in a continued short-term uptrend despite being overbought. If I apply Newsom's Market Rule #1: Don't get crossways with the trend, and Newton's First Law of Motion to markets (a trending market will stay in that trend until acted upon by an outside force), then I need to stick with 'Up' for now," said Darin Newsom Analysis Inc. president Darin Newsom. "Short-term resistance is at the 4-day high of $1,824.60 while short-term support is at the 4-day low of $1,798.60. That makes for a narrow range and increases the chance of a breakout in one direction or other."
Working in gold's favor going forward could be renewed recession fears, said Adrian Day Asset Management president Adrian Day.
"The market slowly realizes that the Fed can't bring inflation down meaningfully without causing a recession. That is positive for gold since it suggests a pause, even if not a pivot in the Fed's tightening policy. We have slowdowns in many economic indicators before the Fed even begins its announced process of reducing the balance sheet," Day said. "If the Fed begins to withdraw liquidity in any serious manner, the recession will get worse very quickly."
