Gold Investors Still Have To Fight Against Surging U.S. Dollar
(Kitco News)- The gold market will remain atthe mercy of the U.S. dollar, and some analysts warn that the metal’s downtrendin place since April is not expected to change anytime soon.
Gold is heading for another weekin negative territory with its fourth drop in five weeks as prices have slumpedto a new 12-month low. August gold futures last traded at $1,242.60 an ounce,down 1% from the previous week.
Gold's weakness comes as the U.S. Dollar Index continues to trade near a 12-month high, last trading at 94.85 points.
In what has been a frustratingweek for gold investors, the yellow metal has ignored all positive fundamentaldata, including a rise in geopolitical tensions, inflation pressures andnegative real interest rates.
“Gold remains completelyimperturbable. Or to put it another way - no matter what happens, the goldprice does not rise to any significant extent,” said commodity analysts atCommerzbank in a report Friday.
They later added: “Why gold isnot profiting from the current turmoil is something that puzzles us more andmore each day. We believe the gold price to be undervalued and expect anoticeable recovery in the second half of the year.”
A positive for gold should be thefact that real interest rates have dropped back into negative territory. In areport Thursday, the U.S. Labor Department said that its annual Consumer PriceIndex rose to 2.9%, its highest level in more than six years. Inflation is nowabove 10-year bond yields, which are currently trading at 2.83%. Investors whobought 10-year Treasuries are losing seven basis points on their investmentbecause of rising inflation.
However, Lukman Otunuga, researchanalyst at FXTM, said investors can throw positive fundamentals out the windowas the U.S. economy, rising interest rates and a rising U.S. dollar continue todominate the market.
“Investors are more concernedwith the value of the U.S. dollar than they are with gold,” he said. “It wouldtake something extreme to push gold higher and we don’t see anything on thehorizon.”
Otunuga added that markets andinvestors are numb and complacent to the growing threat of a global trade war.He explained that strong momentum in the U.S. economy has reduced the need forsafe-haven assets.
“Even though there is a lot ofuncertainty, it seems that the U.S. dollar continues to steal gold’s spot asthe new safe haven,” he said. “Economic sentiment for the U.S. economy remainsextremely bullish so investors are more inclined to buy U.S. dollar andequities than gold.”
Momentum Supports Higher U.S. Dollar,
Although the U.S. dollar indexremains near a 12-month high, Neil Mellor, senior currency strategist at BNYMellon, said that there is room for the greenback to move higher.
“The U.S. dollar index still hasa ways to go before it hits the 2016 highs,” he said. “But instead of levels,it might be the pace of appreciation that we need to pay more attention to.”
While Mellor remains bullish onthe U.S. dollar in the near term, he added that the Federal Reserve could beconcerned that the currency is moving too high too fast and could make somecomments to slow the rally.
“It is difficult to be bearish onthe U.S. dollar right now.” he said.
Fed Chair In The Hot Seat Next Week
Fed Chair Jerome Powell’ssemiannual testimony before Congress represents the biggest economic event nextweek and, according to one analyst, could be positive for gold.
Bart Melek, head of commoditystrategy at TD Securities, said that he sees the potential for a retracement inthe U.S. dollar as the Powell highlights growing risks in the U.S. economy.
“The Fed is going to have toacknowledge the growing risk from global trade tensions,” he said.
While the Federal Reserve seestwo more rate hikes this year, Melek added that the central bank is stillcommitted to a gradual rise in interest rates. He explained that thistrajectory will continue to flatten the yield curve as short-term yields riseand long-term yields falls and will keep real interest rates lower. Both ofthese issues are bullish for gold.
Melek admitted that currentlythere is a breakdown in gold’s fundamental correlations, but this trend can’tlast; at some point the market has to “revert back to the mean,” he said.
Mellor said that he doesn’t thinkPowell’s comments will add much momentum to the U.S. dollar, but he added thatthe dollar can still move higher without bullish comments.
“Powell is very bullish on theU.S. economy. The rhetoric is already pretty hawkish. I don’t know if he canadd anything new,” Mellor said. “However, gold will continue to benefit fromgrowing monetary policy divergence between the U.S. and Europe.”
Investors Shouldn’t Ignore Seasonal Factors
Colin Cieszynski, chief marketstrategist at SIA Wealth Management, said one fundamental factor that investorsneed to keep an eye on is gold’s seasonal performance. Traditionally, the goldmarket weakens in the summer.
He added that the market stillhas a few more weeks in this slow period and that could mean lower prices inthe near term.
“It’s possible that we retest theJuly 2017 lows at $1,205 an ounce,” he said. “I don’t think you can fight thetechnical picture, which points to a higher U.S. dollar and a lower goldprice.”
The Final Say
While Powell’s testimony will be front andcenter, investors will see a pickup in the amount of economic data next week.The new trading week starts off with the release of retail sales data for June.Other key reports include regional manufacturing data from the New York FederalReserve and the Philadelphia Federal Reserve, plus housing construction data.
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