What Will It Take To Drive Gold Prices Higher: Kitco News Weekly Outlook
(Kitco News)- Unless there is asignificant breakdown in equities or the U.S. dollar, gold investors can expectto see further grind in the marketplace, according to one commodity analyst.
Although gold prices could testthe top end of their range, around $1,350 an ounce, as the market finds supportfrom disappointing labor market data and escalation of trade war rhetoricbetween the U.S. and China, analysts are not expecting to see a breakoutanytime soon.
“I think we could see goldprices push higher by $10 or so but ultimately, interest rate expectations arefirmly in place and that will support the U.S. dollar and weigh on gold,” saidBart Melek, head of commodity strategy at TD Securities.
Gold prices are ending theweek stuck firmly in the middle of its near-term trading range; June goldfutures last traded at $1,334 an ounce, up 0.5% since last Friday.
The silver market is alsoending the week in positive territory, but prices are near the bottom end of theirtrading range as the market continues to underperform gold. May silver futures last traded at $16.335 anounce, up 0.41%.
Ole Hansen, head ofcommodity strategy at Saxo Bank, said in a recent research note that silvercould be the reason why gold has been able to break near-term resistance at$1,355 an ounce. For now, he looks for gold to remain range-bound in theshort-term.
“The uncertain geopoliticaloutlook and increased stock market volatility is likely to continue to providesome underlying support,” he said. “There's no doubt, however, that multiplerejections since 2016 are likely to have sidelined potential buyers who are nowhappy to sit on the fence while waiting for a potential break above $1375/oz,2016 high.”
What Does Gold Need To Break Out?
David Madden, market analystat CMC Markets, said that he sees two factors that could drive gold priceshigher: weaker equity markets or a weaker U.S. dollar. He added though thatthere is no indication that investor sentiment is going to shift anytime soon.
Both the Dow JonesIndustrial Average and the S&P 500 have managed to hold on to theirlong-term uptrend, bouncing off critical technical support at their 200-daymoving averages. Although there is growing uncertainty in the marketplace,Madden said that consistent investor optimism will continue to support prices.
He added that both the Dowand the S&P 500 have to push clearly below their 200-day moving averages ifgold is going to find enough momentum to break its range.
Looking at the U.S. dollar,Madden noted that it before the employment report the greenback traded at a5.5-week high against a basket of currencies. He added that underlying strengthin the U.S. dollar will also weigh on gold prices.
However, Madden is notexpecting to see a significant selloff in gold anytime soon as there is substantialunderlying support for the yellow metal.
Christopher Vecchio, seniorcurrency strategist at DailFX.com, described the gold market as a “grind.” Headded that investors need to be patient as he doesn’t see long-term potentialfor the U.S. dollar.
“There is so much going onright now that there is no direction in the marketplace,” he said. “If you aregoing to trade gold then I recommend small positions and for traders to benimble.”
While gold has room to movehigher in the near-term, Vecchio said that he would not chase the market atcurrent levels. He added that he prefers to buy gold at the lower end of itstrading range.
“Long-term the U.S. dollaris not in a good position even if it can move higher in the near-term,” hesaid. “I prefer to buy gold on dips to add to my position and prepare for aneventual breakout. I think we could see gold higher in the second half of theyear.”
Vecchio said that he islong-term bearish on the U.S. dollar because the government’s deficit spendingis unstainable. He added this topic will become more of an issue later in theyear.
U.S. Dollar Still Has Room To Move Higher
While some investors wereexpecting to see a sharp selloff in the U.S. dollar, analysts note that whilethe headline data was disappointing, the components of the report were notdisastrous. The data showed that 103,000 jobs were created last month, wellbelow expectations for job growth of 188,000 jobs.
At the same time wage growthgrew 0.3% last month, in line with expectations. For the year wages increased2.7%.
Melek noted that wages,while not accelerating, still show healthy growth. He added that the unemploymentrate also remains low -- two positive factors for the labor market.
“The employment gains were alittle disappointing, but the fact of the matter is that the report wasn’thorrible,” he said.
Ultimately, Melek said thatthe employment report wasn’t bad enough to shift market expectations for theFederal Reserve to raise interest rates in June, which will provide support forthe U.S. dollar and cap any gold rally.
But he added that despiteexpected interest rate hikes, gold is still in a good place.
Levels To Watch
For now, analysts arewatching near-term resistance between $1,355 and $1,360 an ounce with a breakof that level signaling a move to the 2016 high at $1,375 and then the push to$1,400 an ounce.
On the downside, manytechnical analysts say that gold remains in an uptrend as long as prices canhold critical support at $1,300 an ounce. In the near-term analysts arewatching initial support at $1,325 an ounce.
The Final Say...
With growing focus on theU.S. dollar and interest rate expectations, many economists have noted thatnext week’s employment data will be important, especially after Friday’sdisappointing employment data.
Madden said that anybreakdown in the data could weigh on the U.S. dollar and support gold prices.
Next week is a big week forinflation data with the release of the Producer Price Index and Consumer PriceIndex. The market will also pay close attention to the minutes of the Marchmonetary policy meeting.
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.