Kitco News Weekly Outlook: What Happened To Gold Prices?
(Kitco News)- The gold market is ending its secondconsecutive week in negative territory and many investors are asking: Whathappened?
Gold’s losses come as equitymarkets fell sharply into corrective territory, with the past week seeing the Dow Jones Industrial Average shedding more than 1,000 points in two sessions.In total, the Dow, last trading at 23,784 points is down more than 6% sincelast Friday and has dropped more than 10% since posting record highs just twoweeks ago.
However, gold, while pointing tofurther weekly losses, has outperformed equity markets on a relative basis. ComexApril gold futures last traded at $1,316.60 an ounce, down 2.7% from theprevious week. Silver has also held up on a relative basis, last trading at$16.21 an ounce, down almost 3% from the previous week.
“It’s not uncommon to see golddown in a sharp correction,” said Eugen Weinberg, head of commodity research atCommerzbank. “In the first wave of a market correction, we would expect to seeindiscriminate selling as investors raise cash. They are going to sell theirprofitable, liquid trades and that is gold.”
Looking ahead, while gold pricescould continue to push lower in the near term, Weinberg said that it wouldn’ttake much for gold to regain its safe-haven luster. He added that he expectslong-term value investors to take advantage of lower prices in the near term.
“The longer the crisis inequities lasts, the more demand there will be for safe-haven assets,” he said.“There should be reliable safe-haven demand at $1,300 an ounce.”
Jasper Lawler, head of researchat London Capital Group, agreed that the correction in equities isn’t enough tospur safe-haven demand for gold. He added that a 10% correction is seen as“healthy” by many equity analysts. However, he added that the longer equitiessay down, the more attractive gold looks.
“People need to lose moreconfidence in equities. Once they see that markets are not going to turn aroundright way, they will look at taking more defensive positions and I would expectthem to turn to gold,” he said.
Lawler added that investorsshouldn’t expect to see gold prices skyrocket either as there are growingexpectations for global central banks to tighten monetary policy moreaggressively.
“Inflation is turning andinvestors are wondering how central banks are going to react,” he said. “Thegold market really needs to see higher inflation but relatively low interestrates to break out to new highs.”
Interest Rate Expectations On The Rise
At the start of the year, CME30-day Fed fund futures were only pricing in two rate hikes by the end of 2018.In the past week those expectations have risen sharply, as markets have startedto price in the possibility of four interest rate hike by the end of the year.
Helping to guide marketexpectations, Federal Reserve committee members were out in full force thispast week talking up the idea of “gradual increases” in interest rates.
Thursday, New York Fed PresidentWilliam Dudley, in an interview with Bloomberg, dismissed the current stock-marketcorrection as “small potatoes.”
"Clearly the market isadjusting to the fact that the global economy is growing quite quickly and as aconsequence of that, monetary authorities around the world are either startingto remove accommodation or thinking about starting to remove accommodation, andthat's a little different than the environment we were in the prior seven oreight years," he said in the interview. “I have more confidence in thedurability of the expansion and more confidence that the Federal Reserve isgoing to have to continue to more monetary policy accommodation.”
Investors Need To Keep An Eye On USD
Along with interest rates,commodity analysts say that gold investors also need to keep an eye on the U.S.Dollar Index, which has bounced 1.5% since hitting a three-year low two weeks ago.
“While the U.S. dollar showssigns of bottoming out against major currencies, gold will have a tough timebreaking out,” said Lawler.
While a stronger U.S. dollar willweigh on gold, some analysts think that the greenback is oversold.
“The near-term fundamentalpicture has improved for the greenback, though we expect any bounces are likelyto be short-lived and offer better levels to sell,” said currency analysts atTD Securities in a recent report.
Goldman Sachs analysts Thursdayincreased their 12-month gold-price forecast. The global investment firm seesgold prices pushing to $1,450 an ounce next year. They are bullish on gold asthey see emerging-market currencies outperforming the U.S. dollar though 2018.
Bill Baruch, president of BlueLine Futures, said that he sees the recent rally in the U.S. dollar as a bear-marketbounce and looks for the greenback to hit major resistance in the near term,which will be positive for gold.
“I think if the U.S. dollar indexhad enough momentum, it should have pushed to 91,” he said. “The index isclinging to 90 and ultimately, I don’t think this level is going to hold.”
While Baruch likes gold atcurrent levels, he added that he would like to buy around $1,301 as the marketstill could see lower prices in the near term.
Levels To Watch
With gold prices pushing belowcritical initial support levels, analysts say that the next level to watch is$1,301 an ounce. If that support breaks then prices could fall to $1,280 anounce.
Chris Beauchamp, market analyst,at IG, said that he is looking for $1,313 to hold as support that will attractbargain hunters.
“Momentum is oversold once again,so dip buyers may want to keep gold on their radar,’ he said.
Lawler said that he would notturn outright bearish on gold unless prices pushed below $1,240 an ounce.
The Final Say
According to analysts andeconomists, next week is all about inflation as markets will receive theConsumer Price Index report for January. If inflation does push higher towardthe Federal Reserve’s 2% target, then equity markets could have further room tofall as this would force the U.S. central bank to be more aggressive in withmonetary policy.
The data could be negative forgold since aggressive central bank action could push expectations for realinterest rates to move higher, increasing the yellow metal’s opportunity costs.
Another key report will be retailsales. The U.S. economy runs on consumerism so any rise in spending could be abalm for jittery markets, according to some economists.
Off Broadway, markets willreceive some regional manufacturing data for February and housing starts andbuilding permit numbers for January.
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.