Photo by Katie Harp on Unsplash
 

On Monday, gold had its biggest single-day gain since May, rising 2.9% to close at $4,140 per ounce. The immediate catalyst to this move was the two major events over the weekend: the move towards ending the US government shutdown, potentially as soon as Wednesday. And the de-escalation in the trade war with China. Both were widely anticipated to help support the gold market.

The question for traders is whether the trend will continue. The basis for gains seems to be on hopes that the Fed will cut rates further, with a lower terminal rate for the current easing cycle. Gold prices trended lower in the first week of November after Fed Chair Jerome Powell threw some cold water on hopes of a rate cut in December. Markets are still penciling in a 25 bps rate reduction next month, but the chances have fallen to just over 60%, down from more than 80% a couple of weeks ago.
 

Gold Heading Back Towards $4,500?

The government’s return to work means that economic data that has been delayed for over a month will finally be released. This would provide some much-needed context for the state of the economy, and fill in some crucial data gaps. Top of mind for many traders is the updated official measure on the job market, including the unemployment rate. This is a key measure being used by the FOMC to cut rates while inflation is still above the Fed’s target.

Economists believe that the official data will reveal a worse outlook for the US economy than the private data has shown so far. Based on the data that has become available, the Fed’s GDPNow tracker is predicting the current quarter’s GDP at an annual growth rate of 4.0%. But many economists believe that if there is a full slate of data, those predictions would be reduced. As the economy slows, the Fed would be more inclined to cut rates and go into next year with a bias towards easing.
 

And Rising Inflation?

Bullion’s appeal as a store of value is also evident in the latest move. US President Donald Trump suggested on Sunday that the government could receive a “tariff dividend.” He proposed sending checks similar to the Covid-era stimulus payments of “at least $2,000 a person. That pandemic stimulus is widely seen as the primary catalyst for the surge in inflation over the last few years, which reduced the dollar’s purchasing power by over 25%.

A combination of lower interest rates due to a weak labor market and high inflation from increased spending is the “goldilocks” combination that could support further upside for gold. It might resume the strong upward trajectory it had during the summer, assuming all the pieces fall into place.
 

Will Gold Hit a Ceiling?

Even including gold’s recent pullback, the yellow metal is on track for the best yearly performance since 1979. That was amid a high-inflation-induced recessionary cycle that lasted several years. On the other hand, if economists’ projections for the US economy are not as dire as forecast, then gold’s upward momentum could fizzle out. Easing tensions with China could also reduce demand for safe-haven assets due to geopolitical uncertainty.

Additionally, there appears to be no clear consensus among FOMC members, with a split between those advocating for further easing and those expressing caution about rate cuts. More Fed talk about the possibility of an economic rebound next year could also clip gold’s wings.

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