Kitco News Weekly Outlook: Gold Prices Are Ending The Week Near A 4-Month High, Here's What's Next
(Kitco News)- There is little standing in gold’s way next week thatwill stop prices from pushing higher in what will be a shortened trading week,according to some analysts.
The gold market is seeing its fifth weekly consecutivegain as prices hold near their highest level in four months. February gold futures lasttraded at $1,331.70 an ounce, up 0.7% since last Friday. Since its December lowgold prices have rallied more than 6.6%.
While gold continues to push higher, silver has hit ahurdle as prices are preparing to end the week in negative territory, ending afour-week winning streak. Marchsilver futures last traded at $17.105 an ounce, down 1% from last week.
Josh Graves, senior market strategist at RJO Futures saidthat he isn’t reading too much into silver’s recent underperformance.
“I think silver’s weakness is based on the fact that allthe attention is on gold,” he said. “Investors see more potential in gold asthe U.S. dollar weakens.”
Look For WeakerU.S. Dollar
Many analysts say they are bullish on gold in thenear-term as a weaker U.S. dollar provides the biggest tailwind for the market.The U.S. Dollar Index ($DXY)last traded at 91.30, down 0.8% since last week.
“Ongoing U.S. dollar weakness will be the biggest driverfor gold in the near term,” said Fawad Razaqzada, technical analyst at CityIndex. “I am bullish on gold as long as prices remain above $1,300.”
Razaqzada said that the market is bearish on the U.S. dollaras global central banks have turned hawkish. In the past week, the Bank ofJapan trimmed its purchases of Japanese government bonds by about $10 billionin the 10-year to 25-year bonds and another $10 billion in bonds withmaturities of more than 25 years. A few days later, the minutes from theDecember European Central Bank monetary policy meeting, showed that thecommittee discussed revising its forward guidance as the regional economycontinues to grow.
Razaqzada, said that growing hawkish sentiment willcontinue to drive global currencies higher against the U.S. dollar in thenear-term.
Not only are other nations looking at tightening monetarypolicy but analysts note that the U.S. economy faces ongoing concerns like weakinflation pressures that will continue to weigh on the U.S. dollar.
David Madden, senior market analyst at CMC Markets, saidthat he sees further weakness in the U.S. dollar as weak inflation pressureswill keep the Federal Reserve from aggressively raising interest rates.
Friday, the latest inflation data showed the U.S.Consumer Price Index ended the year increasing 1.8%. However, the report notedthat inflation remained between 1.7% and 1.8% throughout 2017.
“Economic growth is storming ahead but it’s still amystery why we are not seeing the same kind of growth in inflation pressures,”he said. “I don’t think the Fed will be in any hurry to raise interest rates asinflation remains low.”
Growing Risks WillKeep A Bid In Gold
While inflation remains low in the near-term, Ole Hansen,head of commodity strategy at Saxo Bank, said that he expects gold isbenefiting from renewed diversification as investors look for hedges againstthe potential increase in volatility and inflation.
Hansen added that the tightening from global central banks isexpected to reduce market liquidity, which could ultimately drive volatilityhigher, creating risks for over-valued equity markets. The CBOE VolatilityIndex ($VIX)remains well below its historical average, trading around 10 points.
“What we are seeing is an underlying demand for gold, whichwe haven’t seen for a while,” he said. “Investors are getting a little morecautious as volatility and inflation lurks in the marketplace.”
While Hansen said that there is potential for gold prices tomove higher, he would like to see a consolidation period, which would lead tomore sustainable gains.
“Gold is on fire right now and has made impressivegains since the Dec. 12 low but I think the market is due for someconsolidation,” he said. “Gold needs to consolidate to rebuild investorinterest.”
CorrelationsAre Breaking Down
While there is strong bullish sentiment for gold in thenear-term, there is also a chorus of growing concern as important correlationsin the gold market have broken down.
In particular, the negative correlation between bond yieldsand gold has broken down. Traditionally higher bond yields weighs on goldprices because it raise the yellow metal’s opportunity costs.
This past week say 10-year bond yields rise to their highestlevel since March 2018. However, some analysts have dismissed the relationshipsaying that gold and bonds can rise in tandem, especially if inflation concernsstart to rise.
In a recent interview with Kitco News, Bart Melek, head ofcommodity strategy at TD Securities said that gold traders should also askthemselves why the relationship between bond yields and gold has broken down.
He explained that the weaker U.S. dollar may signal thatglobal investor are losing confidence in U.S. bonds and the economy, which ispositive for gold.
Levelsto Watch
With gold’s rally not expected to end anytime soon, mostanalysts see the September high at $1,357 as the next major near-term target.
Madden added that a break above $1,357 would make the July2016 high around $1,375 as the next major target.
Some analysts see potential for gold to hit $1,400 an ounceas the market continues to benefit from strong positive seasonal factors.
“Gold is setting up for an extremelystrong run and the price action this week puts $1,400 in the cross hairs in avery short period of time,” said Bill Baruch, president of Blue Line Futures.“We want to see Gold maintain a close above previous highs that come in at $1,327.3-$1,328.6in order to keep this immediate term.”
On the downside, analysts have said that the bullish uptrendwill remain in place unless prices fall below $1,300 an ounce.
TheFinal Say
Not only are markets closed Monday for Martin Luther King Jr.Day, but little economic data to be released will make it a relatively quiettrading week, according to some analysts.
Markets will receive regional manufacturing data as well as some housingconstruction data. Outside of the U.S. the Bank of Canada will hold itsmonetary policy meeting. According to reports, markets are pricing in a 75%chance that the bank raises rates next week.
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.