Chris Weston Head of Research at Pepperstone

(MENAFN- Your Mind Media ) Gold remains locked in a battle between buyers and sellers, with neither party showing enough conviction to drive a sustained and persistent directional move in the gold price. However, several factors suggest the balance of risk remains modestly skewed to the upside, with a retest of $4,500 and las’ week’s highs to be tested. Shanghai gold futures remain an important signal, particularly after news that the PBoC added around 630,000 ounces of gold to its reserves in its latest reported purchase. That extends its accumulation programme to a 22nd consecutive month and represents its largest monthly purchase since 202’. As we’ve seen in recent months, moves in Shanghai gold futures can have a meaningful influence on CME futures and spot gold. Continued official-sector buying therefore provides another potential catalyst for upside momentum. There is also limited appetite to build long-USD positions ahead of US PPI and, important’y, Friday’s US core CPI print. At this stage, it would likely require a meaningful inflation surprise to materially alter the thinking of individual Fed members ahead ’f next week’s meeting. US rates markets currently imply a 63% probability of a Fed hike. That pricing will be pushed around in response to the US inflation data, but the divergence between markets and economists is striking: 68 of 76 economists surveyed by Bloomberg expect the Fed to leave rates unchanged, while rates traders currently see a hike as more likely than not. Historically, when rates markets have moved beyond roughly a 50% probability of a Fed move immediately ahead of a meeting, the Fed has nearly always sided with the market. The complication is that this is a Fed under new Chair Kevin Warsh, who has expressed a preference for less forward guidance. If the Fed were to leave rates unchanged while markets were pricing close to a two-in-three probability of a hike, it would send an important signal: the market can no longer rely on Fed pricing immediately ahead of a meeting as the same guide to the eventual decision. That could have consequences beyond next week, potentially increasing the risk premium and implied volatility priced around future FOMC meetings and major US data releases. We also know that Treasury buyback operations begin this week, which could potentially help cap pressure on longer-dated Treasury yields. All else equal, lower long-end yields would be supportive for gold. For now, gold is finely balanced, but the combination of continued Chinese accumulation, the potential for USD weakness into the FOMC, a potentially more supportive Treasury backdrop and continued interest in the debasement trade leaves the directional skew modestly higher.
$4,500 remains the obvious upside level to watch.

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