Gold in 3rd weekly loss; Analysts say upside cracked, not entirely broken

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Investing.com -- Gold bulls are still counting on another record high if the Chicken Little metaphor of saving the world — or more precisely, the U.S. economy, from a government debt default or recession — doesn’t come true. Yet, the path of least resistance for the yellow metal over the past three weeks has been lower.

Gold for June delivery on New York’s Comex settled Friday’s session at $1,944.30 an ounce, up just 60 cents, or 0.03%, on the day. The benchmark gold futures contract fell to a nine-week low of $1,936.90 earlier in the session, after hitting an all-time high of $2,085.40 on May 4. For the week, June gold was off 2% after another 2% loss the prior week and 0.25% the week before that.

The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, was at $1,945.04 by 14:00 ET (18:00 GMT) on Friday, up $4.19, or 0.2% on the day. Spot gold fell to a three-week low of $1,936.85 during the session, after a record high of $2,073.29 earlier this month, according to Investing.com data. For the week, spot gold was down 1.7%, after another 1.7% loss the prior week and 0.3% the week before that.

“The short term trend has turned bearish and unless we see signs of a rebound, which requires strong acceptance above the 38.2% Fibonacci level of $1,975 on a weekly closing basis, a further drop to 61.8% Fibonacci level $1,910 can hardly be ruled out,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“But there's a possibility of gold buyers resurfacing at the test of $1,926 and $1,910 if gold drops to this zone,” Dixit added.

Craig Erlam, analyst at online trading platform OANDA, was also in the camp of a cracked upside for gold that wasn’t entirely broken.

“Gold’s rough week is ending as some investors seek protection in case debt ceiling talks hit a major roadblock at the 11th hour,” Erlam said. “It is crunch time for [Washington] DC and a possible TARP scenario [from 2008] could occur when Congress initially failed to pass the bank bailout program, which is why some traders are running to gold ahead of the long weekend. If it weren’t for another round of hawkish [inflation] data, gold would be finishing the week on a much stronger note.”

President Joe Biden declared Thursday the United States would avoid a disastrous credit default even as lawmakers went on a 10-day break without a deal on raising the nation's borrowing limit to keep paying the bills. There are seven days until June 1 -- the earliest possible point when the government estimates it could run out of money to service its debts -- and missed loan repayments would likely spark a recession, roiling world markets. But members of the House of Representatives began hitting the road for the Memorial Day recess after their final vote Thursday morning and are not due to return until June 4.

“Gold is in the danger zone as optimism remains that a debt-ceiling standoff will be resolved and as U.S. economic resilience will force the Fed to keep rates higher for longer,” Erlam said. “Gold can benefit if inflation doesn’t prove to be too sticky and the labor market starts to soften. The week ahead will provide clarity on what happens with the U.S. default watch and if the U.S. economy remains too strong and warrants further Fed tightening.”

Gold was pressured Friday after the Federal Reserve’s favorite gauge for U.S. inflation came in hotter-than-forecast for April, indicating that the central bank will raise interest rates again in June and July versus expectations for a pause.

All key metrics in the so-called Personal Consumption Expenditures, or PCE, Index rose for last month against forecast levels as the Fed keenly looked for indicators that would compel a hold on its higher-for-longer monetary policy that has already seen 10 rate hikes over 15 months.

For the year to April, the PCE Index expanded at 4.4% versus forecasts for 3.9% and previous growth of 4.2%. For the month of April itself, it jumped 0.4%, as expected and versus a prior expansion of 0.1%.

“Core” PCE, which strips out volatile food and energy prices, gained 4.7% on an annualized basis versus both the projected and previous rate of 4.6%. On a monthly basis, it rose 0.4% against the forecast and prior rate of 0.3%.

“Inflation is a problem and the consumer remains red hot,” economist Adam Button said on the ForexLive forum. “The Fed is going to hike again and now the odds are 58-42% for June and July is 100% with a slight chance of another hike. At some point the Fed will have to pause and evaluate but we're lapping some very high energy numbers now and it's not enough to get inflation to a 3-handle. At minimum, the Fed needs to start seeing some monthly numbers at +0.3% or lower.”