Gold Price Analysis: XAU/USD bears seeking a weekly bearish close, eyes towards $1,750

Update: Gold, XAU/USD is headed towards the end of the North American session lower by some 1.15%. It's been a poor week for gold price so far and they are n the verge of a bearish close for the start of January. A break of $1,780 opens the risk to the $1,750s for the forthcoming weeks. Fundamentally, Gold is tumbling as markets attempt to squeeze in a fourth hike for 2022 in response to yesterday's Federal Open Market Committee minutes. 

The minutes acknowledged that accelerated tapering will give officials the option of raising rates as soon as March. Nevertheless, the US dollar has been unable to catch a sustainable breakout. There was a knee-jerk rally but the dollar ran into offers on Thursday in what was choppy aftermath in markets while US equities attempted to correct the prior session's sell-off.

In the latter part of the session, however, the US dollar made a slight comeback and the bulls cheered affirmations from St. Louis Federal Reserve Bank President James Bullard who said at a meeting of the CFA Society St. Louis that a rate increase as early as March was on the table.

"The FOMC is in (a) good position to take additional steps as necessary to control inflation, including allowing passive balance sheet runoff, increasing the policy rate, and adjusting the timing and pace of subsequent policy rate increases," Bullard said.

"With the real economy strong but inflation well above target, US monetary policy has shifted to more directly combat inflation pressure," Bullard said, adding that he expects cases of the omicron variant to slow in the coming weeks.

As a result, the FOMC could decide to increase rates sooner and faster than previously expected, Bullard said, echoing statements in the FOMC minutes of the December meeting released on Wednesday.

"The FOMC could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation," Bullard said. "Subsequent rate increases during 2022 could be pulled forward or pushed back depending on inflation developments."

Much now will depend on the Nonfarm Payrolls data, but anything outside of a shock is unlikely to move the needle considering the hawkishness at the Fed.

''The late-December COVID surge likely came too late to prevent a pickup in US payrolls after the gain in November (210k) appeared to be held down by an overly aggressive seasonal factor,'' analysts at TD Securities explained. 

In the near term, however, no matter the outcome of the data, markets will continue to pencil in a Fed balance sheet runoff, which should continue to push real rates higher and weigh on gold.

End of update

Trading conditions in precious metal markets have been choppy in recent trade, though bearish momentum in wake of Wednesday’s hawkish Fed minutes seems to be winning through for now. Spot gold (XAU/USD) prices have tumbled from Asia Pacific session levels in the $1810 area to current levels (and session lows) around $1790, with on-the-day losses currently standing at just over 1.0%. A late-European morning rebound that saw spot prices rebound from the mid-$1790s to near the $1810 level again ultimately proved nothing more than an intra-day dead-cat bounce and a good opportunity for gold bears to add to short positions.

On its way lower to test the $1790 area, XAU/USD has fallen through a succession of key moving averages (the 21, 50 and 200DMAs which all reside between $1797 and $1805). But the bears have so far not been able to send gold prices decisively underneath support in the form of recent lows, including last week’s low at $1789.50 and the low from the week before at $1785. Should these lows go, bearish technicians will likely target a swift test of December’s sub-$1760 lows.

Selling pressure in gold markets has not come as a surprise to many analysts who observed US real yields, with which gold typically has a tight negative correlation, surging in wake of Wednesday’s Fed minutes. Short-Term Interest Rate markets have busily been bringing forward bets as to when the Fed’s rate-hiking cycle will get underway and how high the bank will ultimately take rates. But with markets also increasingly buying into the Fed’s bullish economic outlook, this added dose of Fed hawkishness has not been depressing long-term growth and inflation expectations. The net result is surging real yields and the 10-year TIPS yield notable surged to its highest level in over six months on Thursday above -0.80%. When the 10-year TIPS yield was last close to the 0.80% level back in September, XAU/USD was trading under $1750.

For spot gold’s losses to really accelerate, the US dollar is likely going to need to pick up a little more from current levels. The DXY remains locked within the 95.50-96.90ish range that has prevailed now for multiple weeks, despite recent upside in yields and downside in stocks in wake of the hawkish Fed. If the dollar does start kicking higher (perhaps Friday’s US jobs report could be a catalyst), that combined with higher real yields could be a big bearish risk for gold.