Gold Wants To Grind Higher Despite The Latest Failed Breakout - Analysts
(Kitco News)- Forthose keeping score at home, the gold market has seen seven failed breakoutattempts since its multi-year high reached in 2016.
Whilethe lack of follow-through buying has been demoralizing for some goldinvestors, many analysts continue to point out that the gold prices are still in asolid uptrend, creating higher lows along the way.
“Themarket is struggling, but it looks like it wants to grind higher,” said DarinNewsome, senior technical analyst at DNT.
Headded that geopolitical instability will continue to support gold as asafe-haven asset.
Althoughthe gold market is well off its eight-week highs seen earlier in the week, itis still holding on to positive gains. June gold futures last traded at$1,347.80 an ounce, up almost 1% since the previous Friday.
“Onbalance I see limited reason for selling but at the same time, I am verydisappointing that gold once again failed to break higher although it is edgingcloser,’ said Ole Hansen, head of commodity strategy at Saxo Bank.
Thesilver market is also showing signs of life as it shows gains for the secondconsecutive week. May silver futures last traded at $16.655 an ounce, up 1.6%since last week. The silver market garnered extra attention this past weekafter GFMS Thompson Reuters said -- in its World Silver Report for the SilverInstitute -- silver supply fell for the second consecutive year, dropped 4.1%in 2017.
However,the analysts said that this drop in supply will have less impact on prices thaninvestors might think.
“It’salso the fact that you have a lot of above-ground stocks... in terms of bars andcoins that are available to feed the market,” said Johann Wiebe, lead metalsanalyst for GFMS Thomson Reuters in an interview with Kitco News. “So itdoesn’t necessarily mean that a deficit will lead to higher prices.”
However,many commodity analysts remain optimistic that silver can still outperformprices if the market can break out of its well-established trading range.
Turningback to gold, in an email comment to Kitco News, Mike McGlone, analyst atBloomberg Intelligence, said that it is only a matter of time before pricesbreak higher, saying that the “market is as ripe as it gets.”
Headded that growing stock market volatility and a weaker U.S. dollar will remaincritical factors in gold’s uptrend.
Oil Market Can SupportHigher Gold Prices
Oilprices, which are trading near a four-year high could help to push gold priceshigher and the entire commodity complex.
Ina report published Friday, analysts at Goldman Sachs reiterated their bullishcall on commodities this year, driven by higher oil prices.
“Withlow cross-asset correlations, increasing inflationary risks, a positive carryand the potential for oil supply disruptions in the Middle East, the strategiccase for owning commodities has rarely been stronger,” the Goldman analystswrote in their report.
Withinthe commodity sector, the global investment bank is also particularly bullishon gold as it sees prices hitting $1,450 an ounce by the end of 2018
Ronald-PeterStoeferle, fund manager at Incrementum AG and author of the annual In Gold WeTrust report, said that higher gold prices will ultimately push inflationhigher, which is supportive for gold prices.
McGlonesaid that he sees more potential in gold compared to oil. He noted that thegold/oil ratio, a measurement of the price of one ounce of gold versus a barrelof oil, is at its lowest level since 2015.
Headded that as he expects the ratio to move back to its historical average,which would push prices above $1,400 an ounce and oil to $54 a barrel.
Equities Will Impact GoldPrices
Alongwith oil prices, some analysts have also reiterated that gold investors need tokeep an eye on equity markets as there has been a steady negative correlationbetween the two.
Somegold analysts note that stocks overall look fragile as markets hug their200-day moving averages. The S&P 500 is struggling to hold on to gainsheading into the weekend despite a strong start to the earnings season asJPMorgan (NYSE: JPM), Citigroup (NYSE: C) and Wells Fargo (NYSE: NFC) all beat earnings expectations.
Someanalysts have noted that geopolitical uncertainty will continue to supportvolatility in the marketplace, which will weigh on equities.
Despitethe positive start to the earnings season, Jasper Lawler, head of research atthe London Capital Group, said it’s only a matter of time before equities pushlower.
“Ithink we are seeing a small correction in a bear market and once thisconsolidation period is over the downtrend will resume,” he said. “We areseeing consolidation in equities, the U.S. dollar, bonds and gold and I thinkonce this period is over we will see a continuation of the overall trends. Ithink we will see a weaker U.S. dollar and stronger gold prices.”
Stoeferleis also expecting to see higher gold prices because of a weaker. U.S. dollar.He added that it is difficult to get excited about the U.S. economy and thegreenback when government spending has become unhinged.
“Thispast week the Congressional Budget Office in Washington D.C. estimates that thebudget deficit will surpass $1 trillion by 2020. And will reach $981 trillionin the 2019 fiscal year.
“Ifthis is how the government spends when the economy is booming, it is hard toimagine what their response will be when the U.S. falls into a recession,”asked Stoeferle.
How to play gold; Buy TheMiners?
Someanalysts are recommending traders look at placing bullish straddle strategiesin the gold market, as prices hold near the top end of its range.
Andwhile there is no clear consensus, some analysts say that the best way to playgold is to buy miners.
"Minersare probably the best way to trade it because the leverage here is going to betremendous," said Boris Schlossberg in an interview with CNBC. "Evenif they hedge some of their production going forward, the new higher prices aregoing to create much better earnings for them going forward."
FrankHolmes, CEO of U.S. Global Investors, also said - in an interview with KitcoNews - that he currently prefers gold equities versus the physical metal, evenas he expects gold prices to push above $1,500 an ounce eventually.
Holmesalso quantified his mining outlook, saying that investors need to hold miningcompanies that are showing value, increasing reserves, boosting production andkeeps costs under control.
However,famed investor and Shark Tank star, Kevin O’Leary said in an interview withKitco News, said that he prefers to hold physical gold than the miners.
“Thevalue of the commodity is whatever it is every day. I don’t need to have amanager in the middle screwing up his capital cost allowance, not controllinghis costs,” he said.
Lawlersaid that the critical level in gold remains $1,375.
“Oncethis level breaks there is no putting the genie back in the bottle,” he said.
The Final Say...
Whilegold investors will focus on important outside markets to determine thenear-term potential for the yellow metal, they will also need to keep one eyeon economic data.
Atthe start of the week, markets will receive regional manufacturing data, aswell as retail sales numbers for March.
Marketswill also receive housing construction data.
Mid-week,markets will also have to digest the Federal Reserve’s latest Beige Bookreport. However, the minutes of the March central bank monetary policy meetingshow that Federal Reserve committee members are already optimistic about theU.S. economy.
Inother central bank news, the Bank of Canada will hold its monetary policymeeting and markets are expecting interest rates to remain unchanged.
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.