Gold Investors Need To Keep An Eye On Oil Prices Next Week
(Kitco News)- Goldhas given up its October gains and analysts say that it will be difficult forthe yellow metal to rally as oil prices fall into bear-market territory,according to some commodity analysts.
We’reonly in the first week, but November is proving to be a disappointing month forgold as the yellow metal trades near a four-week low. December gold futures last traded at $1,208.60 an ounce, down 2% from the previous week. However, asdisappointing as gold has been for some investors, the oil market has beendevastating.
WestTexas Intermediate crude oil has dropped nearly 22% in the last five weeks,falling from a four-year high in early October into a bear market. The oilmarket is seeing its longest losing streak in history.
OleHansen, head of commodity strategy at Saxo Bank said that he is not surprisedgold has struggled as the drop in oil has created extreme pessimism throughoutthe commodity complex. He added that lower oil prices will impact commodityindex funds, which in turn will influence gold prices.
“Oilis arguably the leader of the raw commodity sector. As goes crude, so go theother commodity markets,” said Jim Wyckoff, senior technical analyst atKitco.com.
Althoughthe gold market is not in great shape, Hansen said that he is not ready to bebearish on gold. He said that he is neutral on gold in the near-term.
“Ican’t be outright bearish on gold because I don’t think the oil price weaknessis sustainable,” he said. “I also think that equities also remain weak and thatwill support gold prices.”
Rising Interest Rates,Higher U.S. Dollar Also Weighing On Gold
Notonly is gold getting hit from widespread negative sentiment in the commodityspace, but it is also being dragged lower on expectations that the FederalReserve will continue to raise interest rates, which is supporting the U.S.dollar near a one-year high.
FollowingThursday’s monetary policy meeting, the Federal Reserve, while keeping interestunchanged in a range between 2.00% and 2.25%, reiterated its optimistic view onthe economy, saying that activity has been rising at a strong rate.
“TheCommittee expects that further gradual increases in the target range for thefederal funds rate will be consistent with sustained expansion of economicactivity, strong labor market conditions, and inflation near the Committee’ssymmetric 2 percent objective over the medium term. Risks to the economicoutlook appear roughly balanced.” the central bank said in its statement.
DavidMadden, market analyst at CMC markets said Thursday’s monetary policy statementis probably having more of an impact on gold than the decline in oil prices.
“It’snot a coincidence that gold is down sharply the day after the Federal Reserve saidit will continue to raise interest rates,” said David Madden, market analyst atCMC Markets. “If the U.S. dollar break’s its 2018 highs then that will kickgold back into a downtrend.”
ChristopherVecchio, senior currency strategist at DailyFx.com, said that he also seesfurther weakness in the gold market because of a stronger U.S. dollar.
“It’sgoing to be a tough environment for gold because interest rates are going up,real interest rates are going up and that is supporting the U.S. dollar,” he said.“I think we are going to see lower gold prices so I am staying away from themarket for now.”
ColinCieszynski, chief market strategist, SIA Wealth Management, said that not onlyis oil prices creating negative sentiment in the marketplace, but lower pricesare deflationary, just not enough to force the Federal Reserve off its path ofhigher interest rates. Rising real interest rates because of low energy priceswill be a significant negative for gold going forward.
Cieszynskisaid that he could see prices falling to $1,180 in the near-term as interestrate expectations weigh on the market.
“Thestars just aren’t lining up for gold right now as energy prices fall and theFed continues to raise interest rates,” he said.
Gold Doesn’t Have To FearHigher Interest Rates
Althoughgold has a steep road to travel in the near-term, Vecchio said that there isstill underlying strength in the marketplace.
“TheU.S. dollar is near its highs, bond yields are near their recent highs, butgold is nowhere near its lows,” he said. “Gold’s relative strength is afunction of more volatility in FX markets and equity markets. Gold is holdingup relatively well.”
AxelMerk, in a recent interview with Kitco News, said that although the U.S.economy is healthy, investors shouldn’t completely dismiss gold as a defensiveasset. He added that higher interest rates will lead to higher marketvolatility.
“Isnow the time to be 100% in cash or gold? Probably not, but the time you want todiversify is when things look good. When things turn bad it is a little toolate,” he said. “You have to find the strategy that works for you. You don’twant to hope that things are going to work out.”
Althoughmost analysts say that weak oil prices will weigh on markets, Madden said thathe does see a scenario where the yellow metal could benefit. If weaker crudethreatens global growth expectations then investors could move into gold as asafe-haven asset, he added.
Levels To Watch
Accordingto some analysts, gold’s more than 1% selloff Friday set the state for themarket to test the psychologically important level at $1,200; however, mostanalysts are watching $1,190 a critical support.
“If$1,192 doesn’t hold as support then we have to accept that we will see a newlow in the market,” said Hansen.
Cieszynskisaid that he could see gold prices fall to $1,180 an ounce before investorsstep back into the marketplace.
The Final Say
Itis a relatively slow week for U.S. economic data and investors are expected tocontinue to digest the Federal Reserve’s latest monetary policy decision.
Theweek starts off slow but picks up some momentum with the release of October’sConsumer Price Index; Thursday will see October retail sales data along withregional manufacturing sentiment surveys.
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.  |