Gold price forecast: XAU faces tough path despite economic growth woes

Gold prices are struggling to follow through on gains despite growth downgrades; central bank rate hike bets continue to strengthen, pressuring the yellow metal and XAU/USD pivots between its 26-day EMA.

The price of gold caught a bid overnight, although it appears bulls aren’t too keen to capitalise on further upside. Spot Gold is nearly unchanged for October following last month’s 3.14% drop. Overall, the fundamental outlook remains skewed to the downside as central banks appear to be all but locked in to hike rates later this year and next.

Gold typically underperforms in higher rate environments. Market based measures continue to price in more aggressive central bank hiking. The International Monetary Fund’s (IMF) latest World Economic Outlook update published Tuesday shaved 0.1% off global growth for 2021, from 6.0% to 5.9%. That follows a downgrade in US growth from Goldman Sachs Group Inc (All Sessions) earlier this week.

Despite the gloomy setbacks in forecasted growth, Federal Reserve rate hike bets remain higher. Federal Funds Futures see a 25.1% chance for a 25 basis point hike at the June 2022 FOMC meeting, per the CME’s FedWatch tool. That is up sharply from 15.6% just a week ago, and 10.3% from September 10. That said, markets’ outlook for higher rates appears to be all but locked in, even amid lower growth.

One reason slower growth isn’t dissuading higher rate outlooks likely owes to surging inflation. Central bank policymakers continue to suggest inflation is transitory, but Fed Chair Jerome Powell has recently conceded that higher prices appear to be stickier than first thought earlier this year. Covid related supply chain disruptions are the main culprit for this. Some view gold as an inflation hedge, although there is scant evidence of that behavior. In fact, inflation expectations are at the highest levels since 2013. Gold, however, doesn’t appear charged by that.

Even so, either case – transitory or sticky inflation – wouldn’t bode well for gold. Stickier inflation would likely force central banks to tighten policy, but with the severe drawback of stagflation threats amid lower growth. Either scenario will likely bring higher Treasury yields and a stronger US Dollar – both of which bode poorly for the yellow metal. Overall, a bullish fundamental case for gold is hard to make at the current point in time.

Gold technical forecast

Gold prices are nearly unchanged Wednesday after some modest upside action Tuesday. The month started with a potential breakout from a Falling Wedge pattern, but a liftoff never came. Instead, XAU sputtered below its 26-day Exponential Moving Average, where it continues to trade.

Volatility has leveled off recently, with the Average True Range (ATR) falling near 20, the lowest level since mid-September. A break above the 26-day EMA may see bulls take control. Alternatively, a move lower will look to find support at the wedge’s former resistance level.

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