Has One Tweet Reversed Gold's 3-Month Downtrend?
(Kitco News)- While one tweet has helped to reverse gold’s near-termfortunes, some analysts have said that more work needs to be done to end theyellow metal’s three-month downtrend.
Although gold is ending is second week in negativeterritory, the market is well off its one-year lows as the U.S. dollar bullsreacted to comments from President Donald Trump. Gold’s bounce started Thursdayafternoon after Trump said, in an interview with CNBC, that he was “notthrilled” with rising interest rates as they are hurting economic growth.
August gold futures have managed to hold on to its gains heading into the weekend, last trading at $1,229.20 an ounce, down almost 1% from last week.
The President doubled down on his comments Friday morningin a tweet questioning why the U.S. is raising interest rates as debt isgrowing and coming due. He also called out China and the European Union formanipulating their currencies, taking away the U.S.’s competitive edge.
China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field...
— Donald J. Trump (@realDonaldTrump) July 20, 2018....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?
— Donald J. Trump (@realDonaldTrump) July 20, 2018While gold is testing critical resistance just below$1,236 an ounce, some analysts are questioning whether these comments willreverse gold’s downtrend.
“I think we could see some short-term short squeezethrough next week as investors digest all the geopolitical risk in themarketplace,” said Phillip Streible, senior market analyst at RJO Futures. “But I don’t know if this completely savedthe gold market. Trump’s comments are not going to stop the Fed from raisinginterest rates.”
Streible added technical momentum indicators are stillbearish for gold and that the downward trend is still fairly strong.
However, for investors who are interested in testing thegold waters at current levels, he likes the idea of buying October $1,250calls.
Colin Hamilton, managing director of commodity researchat BMO Capital Markets, is not paying attention to Trump’s latest comments. Inan email comment to Kitco News, he said that the U.S. central bank “seemspretty committed to two more rate hikes this year.”
For gold, Hamilton said that while physical demand isexpected to pick up with prices hovering near a one-year low, the market needsa weaker U.S. dollar to attract major asset managers.
Trump Did NotReveal Anything New
Neil Mellor, senior currency strategist at BNY Mellon,said that he doesn’t see the President’s tweets shifting the strong bullishU.S. dollar sentiment in the marketplace.
“We already know that he doesn’t like a strong U.S.dollar. Nothing he said was new for the market,” he said.
Mellor said that the price action he currently sees ismore an indication of investors taking profits, rather than a reversal offutures.
“Gold has seen some major selling this week. At the sametime, the U.S. dollar has made some big gains so investors are taking someprofits off the table ahead of the week,” he said. “Next week, I think we willsee fresh buying in the U.S. dollar.”
Mellor also said that he doesn’t think that Trump’s tweetswill stop the U.S. central bank from raising interest rates. He also said thatChina has no choice but to continue to devalue its currency to support itseconomy.
“China is trying to deleverage the biggest credit bubblein history,” he said. “A weaker yuan is the only option for the governmentright now.”
At the same time, Mellor added that European economicgrowth would support any hawkish comments from Mario Draghi, president of theEuropean Central Bank, next week.
“I think we are going to see some fresh euro selling andthat will continue to support the U.S. dollar and hurt gold,” he said.
Gold Is Still TheBest Safe-Haven Asset
But not everyone is negative on gold in the near term. EugenWeinberg, head of commodity research at Commerzbank said that the marketreaction to Trump’s central-bank comments is proof that investors should notcompletely ignore gold.
“We can see how much market reaction there was to justone tweet,” he said. “Investors will start looking at gold again because theywill want to focus on security and stability.”
While investors having been swept up in the euphoria ofnear-record equity valuations, Weinberg said that cracks are starting to showin the global economy and he expects safe-haven demand to grow in the comingmonths.
George Milling-Stanley, head of gold investments at State Street Global Advisors, said ina recent interview with Kitco News that he expects recession fears toeventually push gold prices higher through the rest of the year.
“Ican’t understand why people’s perception of risk seems to have ratcheted downquite significantly in the last few months,” he said. “Circumstances have notimproved to the extent to where I would personally want to be taking on morerisks. If anything, the circumstances have deteriorated with the continued risein equities.”
Levels To Watch
Although gold is seeing a healthy jump off its recent one-yearlow, Weinberg said that more work needs to be before the metal attracts morebuying momentum. He said that gold needs to push above $1,250 an ounce beforeinvestors feel confident that the current downtrend has finished.
Streible added that he is also watching $1,250 an ouncein the near term.
Chris Beauchamp, market analyst at IG, said that gold priceshave to push above $1,265 an ounce before the trend of lower highs is broken.
The Final Say
The economic calendar next week is fairly sparse withlittle major data to be released. The markets will receive some importanthousing sales data and preliminary manufacturing data.
The big economic reports come at the end of the week withthe release of U.S. durable-goods numbers published Thursday and then the firstreading of second quarter U.S. gross domestic product Friday. Economists are expectingthat the U.S. economy grew 4% in the second quarter.
In his testimony before Congress this week, Fed ChairJerome Powell presented a fairly optimistic view on the U.S. economy.
“TheFOMC believes that--for now--the best way forward is to keep gradually raisingthe Federal funds rate,” he said.
With little economic data on tap next week, commodityanalysts will also keep an eye on more rhetoric on global trade. According toreports, Trump has said that he is “ready to go” to launch $500 million intariffs on imported Chinese goods.
“Increasing trade wars raises the risk of slower economicgrowth so we could see more movement into gold,” said Weinberg.
By Kitco NewsFor Kitco News
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