Gold Is Doing What It's Supposed To As Equities Correct - Analysts
(Kitco News)- It has taken a while, but gold is now doing exactly what itis supposed to do as the metal ends the week near a three-month high as U.S.equity markets continue to melt down and bond yields drop.
The gold market is seeing its fourth week of consecutivegains and is on pace to end a six-month downtrend. December gold futures aretrading near a three-week high, last trading at $1,243 an ounce, up more than1% from the previous week. So far this month the yellow metal is up almost 4%.
While gold is benefiting from safe-haven flows, silverinvestment demand remains lackluster. The precious metal is seeing its secondweek of gains but has underperformed compared to gold. The gold-silver ratio onKitco.com remains near its August 23-year high, last trading at 84.20 points. December silver futures lasttraded at $14.775 an ounce.
The gain in gold come as equity markets have dropped thispast week significantly. The tech sector appears to be leading the decline asthe Nasdaq is seeing its biggest monthly loss since 2008. Meanwhile, the Dow JonesIndustrial Average is seeing its worst monthly drop in three years while the S&P500 is witnessing its worst monthly performance in seven years.
“It’s a proper risk-off environment and I wouldn’t besurprised to see further weakness in the near-term,” said Fawad Razaqzada,technical analyst at City Index. “People are moving out of equities and intosafe-haven assets and that is what is driving gold prices.”
Jim Wyckoff, senior technical analyst at Kitco.com, alsonoted that equity market weakness is helping gold prices and expects this trendto continue. “Look for gold prices to continue to appreciate as long as thereis turmoil in the marketplace,” he said.
Christopher Vecchio, senior currency strategist, atDailyFX.com is also near-term bullish on gold as technical momentum issupported the rally.
“We are seeing equity markets drop along with bond yields,which means real interest rates are falling making gold an attractiveinvestment,” he said. “Traders and investors need to start looking at gold as along-term asset.”
Is The Market MovingToo Far Too Fast
While Razaqzada sees potential for gold to push higher inthe near-term, he also cautions investors to curb their enthusiasm a little. Heexplained that markets appear to have moved too far too fast and the sellingmomentum in equities along with the buying momentum in gold could beunsustainable.
Bill Baruch, president of Blue Line futures, said thatalthough there is potential for gold to move higher in the near-term, he alsowarned investors to use caution at current levels.
“When gold is doing what it is supposed to that is when Iget worried,” he said. “I have been buying gold around $1,200 in anticipationfor this rally and now I see major resistance on the horizon,” he said. “Ithink now is the time to take profits and step out of the market.”
For investors who are looking to stay in gold, Baruchrecommended that they protect their position by buying put options and selling calloptions.
Can Gold Fight ADecember Rate Hike
One reason some market analysts are warning gold investorsto use discretion at current levels is that the market could soon startpreparing for what is expected to be the Federal Reserve’s fourth rate hike ofthe year in December.
Historically, gold prices tend to suffer ahead of apotential rate hike as bond yields move higher and the U.S. dollar strengthens.Currently, the market is pricing in a67% chance of a rate hike. Although expectationsare down from 80% last week, expectations are still high for another rate hike.
“Through most of the year, gold has been weak because ofstrong fundamental reasons and those haven’t gone away as we expect the Fed toraise interest rates again in December, said Razaqzada.
Commodity analysts at Capital Economics said that interestrate expectations could come to the forefront and weigh on gold next weekfollowing the release of October’s nonfarm payrolls report Friday.
“If we are right and next Friday’s U.S. employment report isstrong, gold could come off its recent highs,” they said.
Despite strong expectations for another move up in interestrates, Vecchio said that he doesn’t think this is a significant factor for thegold market.
“Traders are looking at gold knowing that interest rates aremoving higher, but the Fed has outlined a fairly hawkish path for interestrates that some are now thinking are not realistic,” he said. “Because the Fedis so hawkish, the only move they can now make is dovish.”
U.S. Growth Solid,But Cracks Are Spreading
Economists have noted that Friday’s third-quarter GrossDomestic Product continues to support a December rate hike as the U.S. economygrew a solid 3.5% between July and September. However, economists also notedthat there are some growing warning signs in the market.
Economists noted that business investment in the thirdquarter was relatively flat and residential investment dropped 4%, adding tofurther weakness in the housing sector. Exports were also down as imports grew,creating an overall drag on the economy.
“Overall, fiscal stimulus is keeping headline GDP growthstrong for now. But that boost will eventually fade and higher interest rateswill weigh more heavily, which is why we expect GDP growth to slow below 2%next year. That in turn should prompt the Fed to stop raising rates by themiddle of 2019, sooner than markets or Fed officials themselves anticipate,”Michael Pearce, senior U.S. economist in a research note published Friday.
Key Levels To Watch
With momentum still firmly on gold’s side, analysts say thecritical level to watch in the near-term will be the $1,260 an ounce level,which represents the July high.
“If gold can get back above the July high then I think weneed to look at $1,300 as a target again,” said Vecchio.
The Final Say
After a relatively quiet week for economic data, the docketpicks up next week with the release of important economic reports.
The reports start Tuesday with the release of Octoberconsumer confidence, followed Wednesday by private-sector employment data. Themarkets will also receive manufacturing sentiment data.
Finally, the week ends with the release of the governmentofficial employment report.
By Neils ChristensenFor Kitco News
Follow neils_C
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.  |