How Low Can Gold Go? Investors Keeping Eye On $1,200
(Kitco News)-Although negative sentiment inthe gold market is at historic highs, some analysts suggest that prices couldcontinue to push lower and possibly below $1,200 an ounce in the near term asthe market lacks a catalyst to reverse the current trend.
While gold is off its recentone-year low, the market is still preparing to end its fourth straight week innegative territory. Gold has closed lower seven out of the last eight weeks.December gold futures last traded at $1,224.40 an ounce, down 0.67% for theweek.
“The rate at which gold is fallingis slowing but the market is still in a classic downtrend,” said David Madden,market analyst at CMC Markets.
But it’s not all doom and gloomfor the precious metals market. Silver has nearly stopped its seven-week downtrend asprices prepare to end the week with slight positive gains. September silver futures last traded at $15.49 an ounce, relatively unchanged on the week.
Turning back to gold, Maddenadded that in the current environment, he expects prices to continue a “slowburn” lower and said they could eventually push below $1,200 an ounce.
“I don’t think we are going tosee a major sell-off in gold, but we could see prices eventually push toimportant support at $1,180,” he said.
Madden added that it is difficultto be bullish on gold in the near term as the U.S. dollar and equity marketscontinue to dominate investor interest.
Simona Gambarini, commoditieseconomist at Capital Economics, agrees that there is enough support in the goldmarket to prevent a total collapse in prices, but she also doesn’t rule out a near-termdrop below $1,200.
Earlier this week, CapitalEconomics revised its 2018 gold outlook and now looks for the yellow metal toend the year at $1,200 an ounce. Gambarini said that analysts revised theiroutlook because of sustained strength in the U.S. dollar.
“The U.S. dollar is unlikely tofall back because of growing trade tensions and further interest-rates hikes,”she said. “In this environment, we don’t think gold will see a sustainablerecovery.”
Cracks Starting To Appear In the U.S. Economy
Ryan McKay, commodity strategistat TD Securities, said that while his firm doesn’t rule out a drop below $1,200an ounce, he doesn’t see sustainable weakness in the yellow metal.
He added that it would takeanother jolt of U.S. dollar strength that pushes the dollar index above 95points to push gold below critical support.
He said that investors shouldstart to pay more attention to U.S. economic data that appears to bedisappointing relative to expectations. On Friday, the government reported thatthe U.S. economy created 157,000 jobs in July, missing expectations for jobgrowth of 191,000. Average hourly wages posted muted growth, increasing 2.7%for the year.
“We have seen a few data pointsthat came in below expectations and a flattening yield curve shows a growingrisk for the U.S. economy, and we think that will eventually boost goldprices,” he said.
Is It Dangerous To Be Short Gold At These Levels?
Many analysts have beenoptimistic on gold as the market could be on the cusp of a trend shift becauseit may be difficult for sentiment to get any more negative than it already is.
Commodity analysts at BMO Capitalmarkets warned investors to not get too complacent with low gold prices.
“In our view, with speculativeshort positions at record highs implying trend projection, market participantsrun the risk of being caught on the wrong side of any reversal in price actionwith China-U.S. trade friction continuing to escalate,” the analysts said in arecent report. “The last time sentiment was as bearish among this community wasend-2015 before positioning aggressively swung the other way.”
The bank said that growingconcern regarding U.S. economic growth in the second half of the year andongoing global trade tensions rising could be the catalysts needed to reversegold’s fortunes.
“With confidence at multi-yearhighs, and gold price volatility near historic lows (and well below the VIX),this suggests to us that investors are reluctant to appreciate that China isnow gearing up for a prolonged period of trade friction, and dismissingoptionality around potential macroeconomic shocks,” the analysts said.
George Gero, managing director atRBC Wealth Management, said that not only are speculative short positions athistoric highs, but traders have bought more than 1 million option puts.
“If a squeeze comes, the guysthat sold those puts are going to have to cover those shorts,” he said. “Theshort positioning in the market is so much bigger than most people think. It’stoo crowded a trade to be short.”
However, even with all thisnegative sentiment, most analysts note that the market is lacking a catalyst tospark a short-covering rally.
“In the past, when bearishspeculative interest has risen above normal levels it has prompted a rally inthe market, but obviously you need a trigger and it is difficult to find onefor gold,” said Gambarini.
“If you are banking on a short squeezeto boost prices, then you are long and won’t admit that you are on the wrongside of the trade,” added Madden.
The Final Say
Next week will be extremely lightfor U.S. economic data. Markets will have to wait until the end of the week formajor inflation numbers, with the U.S. Producer Price Index coming out Thursdayfollowing by the Consumer Price Index Friday.
With little economic data to chew on, analystssay that gold investors need to keep an eye on the U.S. dollar and equitymarkets.
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.