Is Gold At A Bottom As U.S. Economy Grows 4.1%?
(Kitco News)- While gold continues to hover at the bottom end of its rangenear its recent 12-month lows, optimism is growing in the marketplace as thereare signs that the selling pressure is starting to wane.
While gold is preparing to see its third week of consecutivelosses, the market was not hit with a new wave of selling after U.S. economicdata showed the economy expanding by 4.1% in the second quarter. August goldfutures last traded at $1,224.30 an ounce, down 1.4% from the previous Friday.
Ole Hansen, head of commodity strategy at Saxo Bank, saidthat despite the strong gross domestic product (GDP) data, gold has managed tohold above critical support levels. He added that gold could see a bit of aboost going forward as investors readjust their expectations on economic growthgoing forward.
“There is some belief among investors that this could be agood as it gets for the rest of the year,” he said. “Many things have happenedsince the end of the second quarter.”
Bill Baruch, president of Blue Line Futures, said thatalthough the GDP report showed robust growth, the market was already expectinga substantial number. He added that there are fewer factors in place that willcontinue to drive the U.S. dollar high and gold prices lower in the mediumterm.
Looking at gold, he said that the market is pretty much asbearish as it can get.
“Shorts are already positioned in gold and we think we arebuilding a floor. We will continue to see limited downside risk for gold goingforward,” Baruch said.
Maxwell Gold, director of investment strategy at ETFSecurities By Aberdeen Standard Investments said also said that economic growthcould struggle to maintain its current momentum. He added the current goldprice is an attractive entry point for investors to build a strategic position.
“Gold is down but certainly not out,” he said. “The growthnumbers we are seeing are common in late-stage economic cycles and I think goldwill look attractive as investors worry about continued economic growth goingforward.”
Gold Remains ACurrency Trade; Watch The Yuan, USD
While optimism is building within the precious metals spaceas trade war fears weigh on future economic growth, the most significantunknown factor for investors remains currency markets, in particular, theChinese yuan.
Recently, gold has seen a relatively high correlation to theyuan as the Chinese government has weakened its currency to combat U.S. tradepolicies. Many analysts have noted that further weakness in the Chinesecurrency will continue to weigh on gold; however, some are noting that even theyuan has its limits.
“There is potential for further yuan weakness, but even thistrend is becoming exhausted,” he said.
However, Colin Cieszynski, chief market strategist at SIAWealth Management said that he could see further weakness in the yuan as thegovernment remains belligerent towards President Donald Trump and hisadministration.
Some economists have said that China has gotten the most outof a weaker currency and the government could start to look at other measureslike increasing infrastructure spending to further boost economic growth andoffset trade weakness. Commodity analysts have said this scenario would helpboost demand for raw commodities, which in turn would push precious metalsprices higher.
The other major currency to watch is, of course, the U.S.dollar. Christopher Vecchio, senior currency strategist at DailyFX.com, saidthat technically, he sees the potential for further strength in the U.S. dollarin the near-term, which could eventually push gold back to its recent 12-monthlows.
“Without gold clearing above $1,230 an ounce, you don’t wantto be long gold. I would personally not be long gold until we get someconfirmation that this downtrend is over,” he said.
Fed Meeting A Non-Event
Along with a depreciating yuan, many economists note thatU.S. Federal Reserve hawkish monetary policy continues to support the U.S.dollar.
However, Baruch said that he is not convinced that this willcontinue to support the U.S. dollar as the central bank is as hawkish as it canbe.
“I think [Fed Chair Jerome] Powell has done a tremendous jobcommunicating monetary policy and tempering inflation expectations,” he said.
Vecchio said that he is not expecting to see any significantsurprise at next week’s Fed meeting as market expectations are pretty much ashigh as they can be. The CME Fedwatch Tool is pricing in an 89% of a rate hikein September with a 68% chance of a fourth rate hike this year in December.
For next week markets only see a 2.5% chance that thecentral bank raises interest rates.
Gold Investors NeedTo Be Patient
Although optimism is growing in the marketplace, manyanalysts are neutral on gold in the near-term.
Cieszynski said that he wants to be bullish, but he needs tosee prices push above near-term resistance at $1,236. That is also the levelVecchio is watching to signal an end to the current downtrend.
Vecchio added that until he gets that confirmation, the goldmarket looks “fairly ugly.”
Hansen said that he is not in a rush to establish along-term position in gold. He added that if investors are nimble enough, they canplay the trading range between $1,210 an ounce and $1,250.
“This is not the time of the year to make big decisions ondirection,” Hansen said. “Traders are more concerned with getting their kids tothe beach.”
Baruch said that he likes to play gold through the optionsmarkets and is initiating a bull call spread. He said that he likes buyingDecember $1,250 calls while selling $1,300 December calls.
“I think in three months we will see much higher goldprices,” he said.
The Final Say
While the Federal Reserve’s monetary policy meeting is thebig economic event next week, there will be enough economic data released tokeep traders busy.
The week starts with pending home sales, which is gainingmore attention among market participants as the U.S. housing sector shows signsof weakness.
Markets will also receive consumer confidence data, personalincome and spending data and manufacturing data.
Finally, next week ends with a bang with the release of Julyemployment data.
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.