Kitco News Weekly Outlook: Gold Ends Five-Week Winning Streak, What's Next?
(Kitco News)- The U.S. dollar remains the key market gold investorsneed to watch in the near-term as further weakness will continue to support theyellow metal, according to analysts.
Although gold is preparing to end the week in negativeterritory -- ending a five-week winning streak -- analysts see strong technicalmomentum in the marketplace that will continue to support prices.
February gold futures last traded at $1,333.70 anounce, relatively flat from last Friday. Despite the slight pullback, pricesremain near their highest levels in four months.
Ole Hansen, head of commodity strategy at Saxo Bank,said that a shallow correction in gold from last week is a sign that there ispositive underlying sentiment in the marketplace. He added that it is a signthat prices have room to move higher in the near term.
LoomingGovernment Shutdown
Helping to boost gold ahead of the weekend is a weakerU.S. dollar, which has fallen back to a three-year low as markets see a growingrisk of the U.S. government shutting down if Congress is unable to pass budgetresolution legislation.
The U.S. Senate has until midnight before the governmentruns out of money and is forced to shutter nonessential departments and placegovernment employees on furlough.
Christopher Vecchio, senior currency strategist atDailyFx, said that the U.S. dollar is bearing the brunt of ongoing politicaluncertainty in Washington, as markets ignore bullish factors like rising bondyields, strong economic growth and an ongoing equity bull market.
“Political risk is driving the U.S. dollar at thispoint in time,” he said. “Even if the government doesn’t shutdown, will we seea recovery in the U.S. dollar? Maybe, but, I don’t think it is a game changerin the long run. The dollar is sick right now.”
Vecchio added that systemic greenback weakness willcontinue to support gold prices.
“Gold is in a really good place right now,” he said.“I think buying gold on the dips as prices should be the prerogative fortraders in the near-term. We are holding above $1,323 and I think it’s an easyshot through $1,345 to the September highs.”
IsGold Due For A Pull Back
However, someanalysts have warned that because the gold market is at elevated levels, afinal hour deal that sees the government pass a budget could create some profittaking into next week.
Colin Cieszynski, chief market strategist at theFundamental Technician, said that he is neutral on gold in the near-term. Henoted that the market is in a strong uptrend but technical signals point toslowing momentum in the near term.
Sean Lusk, director ofcommercial hedging with Walsh Trading, said that while gold market couldconsolidate lower next week, there is enough technical momentum to keep pricesabove key support levels.
He added that not only is goldbenefiting from a weaker U.S. dollar but fund managers are also moving backinto the yellow metal to establish defensive positions against a potentialcorrection in equity markets and rising inflation concerns.
Yields Continue To Rise But So Does Gold
The breakdown in the negativecorrelation between gold prices and bond yields continues to surpriseinvestors. Ten-year bond yields, at 2.63%, have risen to highest level in ayear, but gold continues to hold near a four-month high.
Hansen said that the divergence inthe correlation bodes well for gold as it is further evidence that there isunderlying support for the yellow metal. He added that while bond yields aregoing up, inflation expectations are also rising, which means real yieldsremain relatively low, a positive factor for gold, which is seen as anon-yielding asset.
Levels To Watch
Cieszynski, said that he sees gold trading in a $20range in the near-term and the next breakout will determine the direction ofthe next trade.
“If gold breaks support at $1,324 an ounce then youwill see lower gold prices,” he said. “If the market breaks resistance at$1,344 an ounce, then the direction is higher.”
While, Vecchio sees critical initial support at $1,323an ounce, he added that he wouldn’t be outright bearish on gold until pricesbroke below $1,305 an ounce. On the upside he said the key level to watch isthe September high at $1,357.
TheFinal Say
The economic calendarwill depend entirely on what happens in Washington. If there is a government shutdown, thentraders get to sleep in, as the government will not release or collect economicdata.
However, if a last-minute deal is made, then nextweek will be fairly busy with variety of economic reports. The key report willcome out on Friday with the first reading of fourthquarter gross domestic product.
Outside of the U.S., traderswill want to keep an eye on the Bank of Japan monetary policy meeting Monday and the European Central Bank meeting Thursday. Hawkishcomments from these two central banks have boostedtheir respective currencies against the U.S. dollar, which in turn has helpedthe gold market.
Also global leaders will converge inDavos Switzerland for the annual World Economic Forum.
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.