Don't Throw In The Towel Just Yet Even If USD Moves Higher - Analysts
(Kitco News)- U.S. dollar strength remains the most significantheadwind for gold prices next week, but many analysts and investors are notready to turn bearish on the yellow metal as there is still a lot ofuncertainty within financial markets.
Gold is preparing to end its third consecutive week innegative territory, but the market remains entrenched in its trading channel,bouncing off a four-week low. Analysts also see gold hovering near its 200-daymoving average at $1,313.90 as a sign of resiliency. June gold futures lasttraded at $1,314 an ounce, down 0.71% from the previous Friday.
The silver market is showing a little more strengthcompared to gold as the market has come a long way from its December lows seenearlier in the week, even as it ends its second week in negative territory. Maysilver futures last traded at $16.425 an ounce, down 0.11% from last week.
Gold's recent lackluster performance has been the resultof surging momentum in the U.S. dollar, which has pushed prices to the highestlevels for the year. Since its mid-April low the U.S. Dollar Index has rallied4%, last trading at 92.80 points.
"Despite a stronger U.S. dollar, gold is still holdingin its range, so I think there is some fundamental strength in gold. There isstill a lot of uncertainty out there and I still see a need for a safe-haven ina portfolio," said Jasper Lawler, head of research at London CapitalGroup.
In comparison to gold, Lawler added that most majorcurrencies, in particular the British pound and the euro, have all fallen belowtheir 200-day moving averages.
U.S. Dollar HasRoom To Move Higher
According to currency analysts, the U.S. dollar has twopillars of strength: technical momentum as the price pushes farther above its200-day moving average and fundamental support.
Adam Button, head of currency strategy at Forexlive.com,thinks the U.S. dollar has room to move higher as it remains the best globalinvestment.
"On balance, the market believes that the U.S.economy is strong than it looks compared to other countries and that willcontinue to be positive for the U.S. dollar," he said.
Ole Hansen, head of commodity strategy at Saxo Bank,explained that before the rally, the U.S. dollar saw unprecedented bearishpositioning. He added that it is going to take some time before those shortpositions are unwound and the market finds some equilibrium again.
However, he added that even if the U.S. dollar does movehigher, he remains bullish on gold prices. Hansen explained there are stilllong-term fundamental issues with the U.S. dollar, including growing governmentdeficits.
"It's too early to look for a reversal in U.S.dollar strength, but at some point, this rally will run out of momentum,"he said. "I think now is a good time to buy gold. I would need to seeprices push below $1,280 before I turn neutral on gold," he said.
Rising Inflation,Equity Uncertainty and Geopolitical Tensions All Bullish For Gold
Although gold's performance has been disappointinglately, some analysts still see the potential for gold as a long-term play,especially after this past week's Federal Reserve monetary policy decision.
While the Federal Reserve left interest rates unchanged Wednesday,many analysts are focused on the Federal's Reserve's forecast that inflationwill "run near the Committee's symmetric 2 percent objective over themedium term."
According to Axel Merk, chief investment officer and presidentof Merk Investments, this phrase means that the U.S. central bank will becomfortable with higher inflation pressure, without having to raise interestrates aggressively.
"The committee is emphasizing that it is okay ifinflation rises above its 2% target," Merk said. "This is a strongindication that the Fed doesn't believe it has to get ahead of inflation. Ithink gold will do well in this environment."
Ultimately, higher inflation in a low-interest rateenvironment leads to real low rates, which is favorable for gold - anon-yielding asset.
Some analysts are also reluctant to sell gold asgeopolitical tensions start to heat up particularly ahead of the May 12deadline when President Trump has to decide whether or not to ratify theinternational nuclear agreement with Iran.
"It is really difficult to price in this risk. Ifthe U.S. backs out of the deal then gold will shoot higher but if they ratifyit then gold will drop," said Adam Button. "Iran is going to be theheadline gold investors need to watch next week.
"Gold is going to continue to drift lower untilthere is another headline crisis," Button added.
Along with geopolitical uncertainty, Lawler said thatgold could also start to attract capital from frustrated equity marketinvestors.
"We are seeing lackluster equity market performancedespite a stellar first-quarter earnings season. If you are looking forrelative strength, I think you should look at gold."
Merk added that he also thinks gold will continue to bean attractive portfolio diversifier as equity markets continue to lookexpensive in an environment of higher volatility and rising interest rates.
The Final Say
Only two U.S. economic reports will be released nextweek, but they will be essential for gold investors. Markets will receive theProducer Price Index and Consumer Price Index numbers, Wednesday and Thursday,respectively.
Higher inflation pressures will be bullish for gold,which is traditionally seen as a hedge against inflation.
The week also have a variety of Fed speakers,including Fed Chair Jerome Powell, who will speak at an event in Zurich,Switzerland.
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.