Trade of the Week: The return of $2k gold?

Spot gold has been trapped within a $46 range for the most part since April 17th.

Though finding support around the upper-$1900 levels over the past two weeks, the precious metal can scarcely keep its head above the psychologically-important $2,000 line.

 

However, this week’s events could go a long way in determining whether we’ll see an upside or downside breakout for spot gold.

 

Here’s a play-by-play on 4 fundamental events over four days that could greatly influence spot gold this week:
 

• Tuesday, May 2nd: Eurozone April inflation

The Eurozone’s CPI (consumer price index), which measures the changes in headline inflation, is forecasted to print at 7%.

If so, that would be an uptick from the 6.9% registered in March.

However, if the official CPI figure drops notably below that 7% mark, suggesting that headline inflation is easing, that would erode expectations for more European Central Bank rate hikes.

And such a notion should weaken the Euro while boosting the US dollar, which in turn may drag spot gold prices lower in USD terms.

Lower-than-expected Eurozone inflation = weaker Euro = stronger US dollar = lower gold

 

 

• Wednesday, May 3rd: Federal Reserve rate decision

The US central bank is likely to raise its benchmark rates by another 25-basis points (bps).

Anything else (no hike/50-bps hike) would be a massive shock to traders and investors worldwide!

However, more importantly, markets are desperate to know whether this week’s Fed rate hike is the final one of a series that began over a year ago.

Confirmation from Fed Chair Jerome Powell that US rates would’ve reached its peak this week could see gold prices resurfacing above the $2k mark.

After all, gold is a zero-yielding asset (investors don’t get paid for holding on to gold) and shudders at the thought of US interest rates moving even higher than expected.

Furthermore, if markets get the sense that Fed rate CUTS are growing likelier in the latter part of 2023, that could give gold further impetus to launch another attempt at a fresh record high!

Fed rate hikes are over/Fed rate cuts later in 2023 = weaker US dollar = a potential return of US$2k gold

 

 

• Thursday, May 4th: European Central Bank rate decision

The ECB is widely expected to hike its own benchmark rates by another 25-bps (same size as the Fed’s rate hike).

However, if the ECB shocks markets with a larger 50-bps hike (11.5% chance of such a shocker), or if ECB President Christine Lagarde presses home policymakers’ intentions to keep hiking rates (especially if Tuesday’s Eurozone CPI greatly exceeds market expectations), then the same formula may be called into action once more:

More hawkish ECB = stronger Euro = weaker US dollar = higher gold prices in USD terms.

 

 

• Friday, May 5th: US jobs report

The US nonfarm payrolls headline number has to greatly defy the market-forecasted 180,000 print in order for gold to drag gold lower.

Further signs of resilient hiring momentum, despite the 475-bps (excluding this week’s expected 25-bps hike) in Fed rate hikes that were intended to destroy demand since Q1 2022, would suggest that the Fed can ill afford to pause its rate-hike cycle after this week.

Also, if April’s unemployment rate stubbornly matches the 3.5% rate set in March, as opposed to ticking higher to 3.6% as per forecasts, would likely add to expectations that the Fed has to stay hawkish (press ahead with more rate hikes).

Stronger-than-expected NFP = more incoming Fed rate hikes = stronger US dollar = weaker gold prices

 

 

Key levels for spot gold

SUPPORT:

• Mid-$1970s: lower bound of recent trading range
   
• $1959.66: early-February cycle high
   
• $1934 - $1949 range: March-early April support
   
• 50-day simple moving average (SMA)

Still, spot gold may not have far to fall, as long as markets refuse to abandon hopes that the Fed will have to start lowering US interest rates later this year.

 

RESISTANCE:

• $2,000: psychologically-important mark
   
• $2032.14: April 5th intraday high
   
• $2048.36: one-year high (since March 2022)

 

The longer it can stay above that $2k mark, the greater the chances of a fresh record high for spot gold!

 

At the time of writing, Bloomberg’s model points to a 72% chance that spot gold will trade within the $1938.57 - $2031.73 range over the next one-week period.

The pivotal events due in the days ahead may also have a great influence on how gold performs in the weeks and months ahead.

 

Gold spot metals Fed rate hike Fed Chair Jerome Powell ECB inflation CPI US Dollar Nonfarm Payrolls NFP US jobs report