Gold outlook remains positive despite drop ahead of FOMC minutes

We have seen a sizeable drop in precious metals prices today, with gold off by 1.2% and silver about 2% worse off compared to Tuesday’s close. The drop has coincided with a recovery in the US dollar. We have heard some hawkish-leaning remarks from various Fed officials this week, while the RBNZ talked up the prospects of another rate rise overnight. In the UK, CPI came in hotter-than-expected. All of these factors have encouraged traders to book profit on precious metals after gold hit a record high on Monday. Silver has also shown little desire to go further higher following its big breakout above $30 last week. Despite their struggles over the past few days, it is far too early to call this the top in metal prices. Indeed, some would argue that after silver’s big breakout last week, the white metal may have just woken up. As far as gold is concerned, well more evidence is needed to confirm its has peaked, for the latest pullback could just be driven by short-term profit-taking. My gold outlook remains bullish and expect an eventual rise to $2500.

Gold outlook: Metals likely to find support on dips

Silver and gold prices have seen support for several reasons this year, with a weaker dollar last week providing the most recent boost. We have seen several weaker US macro pointers since April's non-farm jobs report was released earlier this month. Subsequent data releases have mostly fallen short of expectations, signalling a slowing US economic recovery. Today’s latest US macro highlights included existing home sales coming in much weaker and crude oil inventories showing a surprise build. This month's other disappointing economic reports include the forward-looking manufacturing and services PMIs, as well as data on retail sales, building permits, and housing starts. Even the latest inflation data came in slightly cooler.

Thus, if the trend of weaker macro data continues, then this could lead to lower inflation and lessen the need for prolonged tight monetary policy. Additionally, the Fed's tapering of its balance sheet runoff has also been bearish for the dollar. Meanwhile, optimism over China's economic outlook amid various stimulus measures have also been responsible behind some of the metals’ gains. However, the primary drivers of gold’s gains this year have been inflation-hedging demand and central bank purchases. This is something that will likely continue for a while yet, keeping the bullish gold outlook intact.

Hawkish Fed commentary keeps dollar bears at bay as focus turns to FOMC minutes

Despite its comeback this week, the US dollar has not been able to rise to its lofty levels of April and remains in the negative for the month of May. So, there is a chance it could resume the downtrend as we get into the second half and business end of the week.

With the US economy clearly weakening, it is becoming increasingly difficult to maintain a bullish stance on the dollar, especially after its gains in the first four months of the year against a basket of foreign currencies. If the trend of disappointing data persists, it could suggest a more rapid easing of inflation, reducing the need for prolonged tight monetary policy. So, there is a risk that the Fed might be behind the curve.

Attention now shifts to the minutes from the May FOMC meeting, which will shed light on the Fed’s perspectives on inflation. During that meeting’s press conference, Fed Chair Powell indicated that another rate hike this cycle was unlikely. The minutes will provide a more detailed insight into the Fed's assessment of inflationary risks. This comes after several Fed officials have emphasised the need for maintaining high interest rates for an extended period to control inflation.

Gold outlook: technical factors and levels to watch

Source: TradingView.com

While today’s drop means gold has potentially formed a false break reversal against the April high of $2431, following two unsuccessful attempts to close above that level this week, the underlying trend is rather strong, and more evidence of a top is needed before we turn tactically bearish on gold. Indeed, gold was already back to test a key short-term support zone around $2385, where prior resistance and a short-term bullish trend converges. It is possible that gold may find a bottom here, before pushing higher again. The line in the sand for me is at $2332. A breach below that level would be a bearish outcome. For now, the path of least resistance remains to the upside, and I continue to expect an eventual rally towards $2500 next.

-- Content created by Fawad Razaqzada, Market Analyst

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