Kitco News Weekly Outlook: The Bears Are Out As Gold Investors To Start Focusing On March 21 Rate Hike
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(Kitco News)- Geopolitical uncertainty is helping to support gold pricesbut an impending rate hike in less than two weeks could finally take its tollon the market, with some analysts expecting gold prices to test support below$1,300 an ounce in the near-term.
The gold market is looking to close its second week inrelatively neutral territory, within a narrowing trading range. April goldfutures last traded at $1,325 an ounce.
“Gold has remained resilient, but it could be overwhelmed byheadwinds of higher bond yields, and a stronger U.S. dollar,” said MaxwellGold, director of investment strategy and research at ETF Securities said in aninterview with Kitco News.
After a lackluster start to the year, silver is starting tooutperform gold as prices are ending the week with modest gains. While manyanalysts are optimistic that silver will eventually outshine gold in a marketthat is seeing increased demand. May silver futures last traded at $16.695 anounce, up more than 1% from the previous week.
Looking ahead, Gold said that he expects precious metals tofollow its familiar pattern of selling off ahead of the Federal Reserve’smonetary policy decision and then rally once investors gauge the underlyingtrajectory of interest rates for the rest of the year.
Gold’s comments come following economic data that showedthat the U.S. saw 313,000 new jobs created in February, well above expectationsof gains of around 200,000.
“The probability of a March rate hike, as implied by OIS andFed Funds futures, has been rising steadily since the start of the year andanother strong increase in US non-farm payrolls today all but ensures a 25bphike in the policy rate on 21st March,’ said commodity analysts at CapitalEconomics.
However while the economy continues to create jobs, wagesremain lackluster. Wages increased only 0.1% last month, below expectations forsalaries to rise 0.2%. Many economists have noted that without wage growth,inflation will struggle to push higher.
While markets are expecting higher rates in March,ultimately, Gold said that the lack of inflation and the ongoing threat ofgeopolitical uncertainty would keep the U.S. central bank from aggressivelyraising interest rates in 2018.
“If we are not seeing inflation or growth picking up, it’shard to justify an accelerated path of tightening. Market expectations willrecalibrate in the second half of the year and that is when we will see goldprices benefit the most,” he said.
In the near-term, Gold said that he could see prices tradebetween $1,250 and $1,300 an ounce.
“Any dip below $1,300 is a very attractive entry point tobuild up a strategic allocation in gold,” he said.
Darin Newsom, senior technical analyst at DTN, said that heis also watching $1,250 an ounce as he thinks the market is looking a littleheavy.
“Gold’s inability to break through $1,380 has been veryinteresting. Gold has been resilient lately but its technical picture isforming what looks like a weak branch that is ready to snap,” he said.
Inflation Remains KeyFor U.S. Monetary Policy & Gold
With so much focus on interest rates, gold investors willneed to keep an eye on inflation data, which will be released next week.Economists are expecting U.S. Consumer Price Index to show annual inflationrising 2.2% in February.
However, core inflation, which strips out volatile food andenergy prices is expected to remain unchanged from the previous month,increasing 1.8% for the year.
Gold Still Tied ToThe U.S. Dollar
Although sentiment in the gold market is starting to turnbearish as prices have been unable to retest recent highs, one currency analystsays that it is too early to call an end to the market uptrend.
Neil Mellor, senior currency analyst at the Bank of New YorkMellon, said that he sees both the U.S. dollar and gold caught in a neutraltrading range as both markets face the same balance of headwinds and tailwinds.
While an impending March rate hike will is bullish for theU.S. dollar, ongoing geopolitical uncertainty will weigh on the greenback. Geopoliticaltensions have risen because of the potential of a trade war after the U.S.government announced it will implement a 25% tariff on steel imports and 10% tariffon aluminum imports in 15 days.
“I think the market has to have an overriding reason to goone way or another,” he said. “Would you want to push the U.S. dollar higherwhen there are all these political issues? But do you push the dollar lower ifthe Fed pushes forward with interest rates hikes?”
Ultimately, Mellor said that they are bearish on the U.S.dollar long-term as the bank expects that the central bank will be reluctant toraise rates aggressively in the current market environment.
“When you have no inflation and the threat of trade wars andcurrency wars you don’t want to be aggressively raising rates,” he said. “Nocentral bank wants to see a stronger currency in these market conditions.”
Levels To Watch
On the downside, the critical level to watch remains $1,300an ounce. Many technical analysts have said that gold needs to hold thissupport level to maintain its bullish uptrend.
Newsom said that if $1,300 breaks then the next target towatch is at$1,287 an ounce, but he added that he expects to see an even broadercorrection to $1,250 an ounce.
On the upside, Chris Beauchamp, market analyst at IG, saidthat gold prices have to push above $1,340 an ounce to attract new buyingmomentum.
Bill Baruch, president of Blue Line Futures, said that aweekly close above $1,323 an ounce would neutralize the recent selling pressureand give a small edge to gold bulls in the near-term.
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.