Kitco News Weekly Outlook: Where Are Gold Prices Heading - Flip A Coin, Analysts
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(Kitco News)- Whilethere is still substantial bullish sentiment in the gold market, analysts arerecommending investors taking a more cautious stance next week as prices arecaught in the middle of a near-term trading range.
Accordingto many analysts, gold’s short-term technical is stuck in neutral territory;prices can just as easily fall to $1,300 an ounce, as they could rise back totest resistance at $1,360 an ounce. April gold futures last traded at $1.331.50 an ounce, down almost 2% fromthe previous week. The selloff comes after the yellow metal rallied more than3% last week, its best percentage gain in almost two years.
It’snot just gold that is suffering; silver prices were also dragged lower, lasttrading at $16.55 an ounce, down almost 1% since last week. The marketcontinues to struggle as prices are unable to break above key resistance at $17an ounce.
Analystssaid that gold’s correction after the failed breakout above $1,360 is not asignificant surprise. But the question to answer now: does the market have furtherto correct before it pushes higher?
“Imaintain my positive outlook for gold. If you think the global economic growthlooks shaky, then you want to own some gold,” Ole Hansen, head of commoditystrategy at Saxo Bank. “But I think you need to play gold cautiously and waitfor the breakout."
Inthe near-term, he said that investors need to brace for gold prices to drop to$1,300 an ounce as U.S. bond yields and the U.S. dollar push higher.
GregHarmon, president of Dragonfly Capital, described the gold market asfloundering for direction in an environment of zero momentum.
“IfI were asked how to trade this market I would say: ‘Don’t and look forsomething else to trade,’” he said.
FawadRazaqzada, technical analyst at City Index, said that while gold’s technicaloutlook is unclear, he said that he thinks the risks are skewed to the downsideas he expects the U.S. dollar to find some momentum in the near-term. He addedthat the U.S. dollar’s recent bounce off a three-year low could representlong-term support.
“Iam bullish on the U.S. dollar, so I guess I’m bearish on gold,” the analystsaid. “The U.S. dollar looks oversold and fundamentals don’t support theselower prices.”
U.S. DollarRemains The Biggest Threat To Gold
Accordingto analysts, gold will remain at the mercy of the U.S. dollar, which could --according to analysts at Bank of America Merrill Lynch -- rally about 2% fromcurrent levels. The analysts noted that further Federal Reserve monetary policytightening should continue to support the U.S. dollar through 2018.
“Afterthe aggressive ECB repricing, we think that relative monetary expectations willcease providing cyclical support for EURUSD for now. Attention should shift toaccelerating US growth,” the analysts said. “Our US economics team now expectsUS growth of 2.9% this year and three Fed hikes, followed by three in 2019. Themarket is still priced below this.”
Razaqzada,also expects the U.S. dollar to rally as markets start to focus on interestrate hikes, which are expected to come as soon as March 21. Currently marketsare pricing in a 83% chance of a hike next month. The market see 60% chance ofat least three rate hikes by the end of the year.
“TheFed is going to continue to raise interest rates and that is the only thingthat matters right now,” he said.
However,not all analysts are optimistic that the U.S. dollar can break above importantresistance between 90 points and 91 points. The U.S. Dollar Index last tradedat 89.82 points.
Whileinterest rate hikes support a higher U.S. dollar, markets are ignoring growingdeficit risks, said Christopher Vecchio, senior currency strategist atDailyFx.com.
“Creditrisks are not being discussed and that I think is a big mistake,” he said. “Wecould see a credit rating downgrade this year because of growing deficits andthat will be dollar negative.”
Inthis environment, Vecchio said that it makes sense for investors to diversifytheir equities holding and buy gold as a defensive asset.
“Thisis a good time to buy gold, given the rising credit risks ahead,” he said.
Althoughgold has been unable to break through resistance at $1,360 an ounce, Vecchiosaid that the market has been resilient as bond yields have pushed to four-yearhighs. Traditionally, higher bond yields are negative for gold as it raises theprecious metal’s opportunity costs.
Thefact that gold is holding critical support levels as yields push to 3% is asign that there are bigger factors in play. This could be a sign that we areseeing the start of a regime change in financial markets.”
How To Trade ThisGold Market
WithGold trapped in the middle of its range, analysts recommend that investors andtraders remain patient and look to establish long-term positions on dips.
Razaqzadasaid that while $1,300 looks like an attractive entry point, he would need tosee signs that “sellers are getting trapped and that support is being bought.”
Asto what could get gold finally over the $1,360 wall, analysts say that furtherweakness in equities needs to drive safe-haven demand.
Ina more cautious move, Harmon said that investors could buy long-term calloptions as a low-risk option to capture long-term gains.
New Fed HeadSpeaks
Althoughgold prices could fall either way next week, the market could find some vitalsupport as new Fed Chair Jerome Powell testifies before Congress to discuss thecentral bank’s semiannual monetary policy report.
Marketswill be paying close attention to what the new Fed head has to say about risinginflation and the nation’s economic growth prospects.
However,Vecchio warned that investors expecting to hear hawkish comments from Powellwould walk away disappointed. He said that he expects Powell will toe the lineestablished by his predecessor Janet Yellen.
“Volatileis on the rise and traditionally the Fed has been supportive of markets duringperiods of higher volatility,” he said. “Historically speaking, no Fed Chairhas announced a shift in policy in front of Congress.”
The Final Say
Whilethe spotlight will be on Powell’s testimony Wednesday, the U.S. economiccalendar picks up with the release of home sales data for January,manufacturing data, consumer confidence and the second reading offourth-quarter gross domestic product 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.