Gold Testing Critical Support But Analysts Still See Potential Next Week
(Kitco News)- Gold prices are seeing sharp selling pressure ahead of theweekend, weighted down by surging momentum in the U.S. dollar as monetarypolicy between the U.S. and Europe continue to diverge.
Gold futures are preparing to end the week with heavy losseswith August gold last traded at critical support at $1,280.40 an ounce, down1.71% from last week. The lost comes a day after gold prices rallied to afour-week high. This is gold’s worst week in a month as prices dropped morethan 2% the week of May 14.
However, despite near-term softness in the yellow metal,some analysts are reluctant to be significantly bearish on the yellow metal asgeopolitical uncertainty remain high in the face of a growing trade war betweenthe U.S. and China.
“I think in the short term we can see gold prices lower,but I don’t think we will see a major selloff in gold,” said Jasper Lawler,head of research at London Capital Group. “Given all that has happened thispast week, I think gold is holding up reasonably well. I think it couldstruggle to rally in this environment, but it’s not going significantly lower.”
Eugen Weinberg, head of commodity research atCommerzbank, is also optimistic on gold in the near term, especially as theTrump administration approved $50 billion in new tariffs on Chinese imports. Itis expected that China will again retaliate with its own tariffs on U.S.imports, with agriculture products in the crosshairs.
“Everything right now is going against gold, but I don’tthink you want to be short the metal in this environment,” he said. “I don’tsee one major catalyst that will drive gold higher but there are a lot oflittle factors, and it won’t take much to shift the negative sentiment in thegold market.”
A Tale Of TwoCentral Banks
Earlier in the week, the gold market was able to hold itsground around the critical psychological level around $1,300 an ounce, despitehawkish sentiment from the Federal Reserve after it raised rates by 25 basispoints.
Markets much anticipated the rate hike; however, theFederal Reserve also signaled that it forecasts two more rate hikes this year,one more than markets were expecting. The U.S. central bank also raised itsforecasts for economic growth and saw a lower unemployment rate for the year.
In plain terms, Fed Chair Jerome Powell said: “Theeconomy is doing very well.”
While gold prices jumped to a one-month high followingthe Federal Reserve’s monetary policy meeting, the gains have been short-livedas markets have been digesting dovish comments following the European CentralBank’s monetary policy meeting.
While Mario Draghi said that the ECB is ready to stop itsbond-purchase program at the end of the year, he surprised markets by sayingthat the central bank won’t look at raising rates until at least the summer of2019.
His statement was interpreted Friday by many economistsas being dovish, which has sent the euro dramatically lower against the U.S.dollar. The euro is a significant component in the U.S. Dollar Index, which istrading at its highest level since November 2016.
“After the big breakdown in the EUR/USD exchange rateyesterday, the positively-correlating gold was always going to struggle tosustain its gain,” said Fawad Razaqzada, technical analyst at FOREX.com.
Gold Is Down ButNot Out
David Madden, market analyst at CMC Markets, said thathis bias for gold in the near-term is down as the market has been unable tohold gains above its 200-day moving average, which is around $1,308 an ounce.
However, he described the gold market as dull becauseultimately he sees the market trapped in its well-established range. While thehawkish monetary policy is weighing on prices, global market financialuncertainty is providing some support.
“Gold is trapped between the Fed’s desires to raiseinterest rates but also by its focus on global trade and economic issues,” hesaid. “If the Fed becomes really concerned about trade issues that would bevery supportive for gold.”
Weinberg said that there is enough uncertainty infinancial markets to shift sentiment in gold to a more positive tone quickly.He added that rising inflation and growing concern over the global economymakes gold the best safe-haven asset.
“You definitely don’t want to hold equities in thismarket as volatility picks up,” he said. “You also don’t want to hold bonds asinflation rises either.”
Lawler said that gold will struggle until there is adefinite shift in financial markets, which means a weaker U.S. dollar andweaker equity markets.
Key Levels toWatch
Although gold is down sharply ahead of the weekend,analysts have pointed out that the market is still stuck in a range. On theupside, analysts have said that prices need a sustained break above $1,308 anounce to attract investors back to the marketplace.
On the downside, gold could attract more selling pressureif prices break below critical support at $1,280 an ounce.
“In the near-term Dollar strength worries us, a closeabove 95 in the September Dollar Index will likely put significant pressure onGold and open the door the mid-1280’s,” said Bill Baruch, president of BlueLine Futures. “While the Dollar remains the clear winner this week, one couldview this battle as the best of the weakest and for that reason, the groundworkhas been laid for Gold in the longer-term.”
The Final Say
With all the central bank decision out of the way, themarket will have little to digest next week. The two major reports to bereleased next week is housing construction data for May and regionalmanufacturing data from the Philadelphia Federal Reserve.
Markets will hear from Draghi and Powell as they bothspeak at a European central bank conference next week; however, after theirpress conferences this past week, economists are not expecting any majorsurprises.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.