Gold Price Correction as Fed Rate Hike Pause Looms

Article Summary:

• Gold prices fell due to a stronger dollar and anticipation of a Fed rate pause.
• Strong US jobs report reinforces pause expectations.
• Analysts foresee a potential price correction after recent rallies.
• Geopolitical tensions and ETF flows provide long-term support for gold prices.

Gold prices edged lower on Friday and were on track for a weekly decline as a surprisingly strong U.S. jobs report bolstered expectations that the Federal Reserve will pause interest rate hikes at its December meeting.

Spot gold fell nearly 1% on the day and briefly approached the $4,000 mark before rebounding slightly, as of this writing.

"Gold is consolidating right now, and we are seeing the dollar strengthen quite a bit, behind a lot of speculation on whether the Fed will continue to cut rates," said Brian Lan, managing director at GoldSilver Central. "I think the market is uncertain now, especially as we get close to the end of December, we anticipate a lot of traders will be taking profit on their positions, and that is what we have been seeing from the end of last week until this week."

The dollar index was on track to log its strongest weekly performance in over a month on Friday. A stronger dollar makes dollar-denominated gold more expensive for holders of other currencies.

The U.S. Labor Department report, delayed due to the federal government shutdown, showed that nonfarm payrolls increased by 119,000 in September, more than double the forecast of 50,000.

TD Securities analyst Oscar Munoz said in a note that the jobs report was "something for everyone, with both hawks and doves able to return to their camps."

Minutes from the October FOMC meeting released on Thursday showed that many Fed officials favored holding interest rates steady. Chicago Fed President Austan Goolsbee reiterated on Thursday that he was "uneasy" about pre-emptive rate cuts, especially given that progress on returning inflation to the Fed's 2% target appeared to have stalled and even started moving in the wrong direction.

Swap traders see only a 40% chance of a rate cut next month, compared to just two weeks ago when they were backing a 25-basis-point cut. Typically, when interest rates are high, precious metals underperform the market.

Despite pulling back from record highs, gold is still up more than 50% year-to-date and is on track for its best annual performance since 1979. Exchange-traded fund (ETF) inflows and central bank gold purchases have supported this strong rally. However, this recent rally, fueled by the so-called "debasement trade" (i.e., selling sovereign debt and currencies), may have been overdone.

"The recent debasement trade is based on hope, not reality," said Carsten Menke, head of research at Julius Baer Group. He said that while this phenomenon remains a long-term driver of gold prices amid growing fiscal concerns in G7 nations, some correction and consolidation is warranted.

Additionally, traders are watching geopolitical developments after Ukrainian President Volodymyr Zelenskyy agreed to implement a peace plan drafted by the United States and Russia.

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