Gold Price Uptrend Will Be Sensitive To These Factors Next Week
(Kitco News)- Theuptrend in gold prices might not be able to outlast the winter as bond yieldsare surging higher into the weekend, increasing the yellow metal’s opportunitycosts.
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| Punxsutawney Phil saw his shadow Friday, which means six more weeks of winter. Can the gold rally last that long too? Image courtesy of Alessandro M. |
Friday,Punxsutawney Phil, the famous weather pontificating groundhog, saw his shadow,which means there is still six more weeks of winter left. With gold prices looking to end the week in negative territory, analysts say that gold could beentering a consolidation phase, faced with an uncertain outlook.
“I’mbullish on gold in the near-term. I don’t think the gold market is done justyet but prices need to push above the January highs by the end of the month, orit will be time to sell,” said Adam Button, senior currency strategist atForexlive.com.
Theseven-week uptrend in gold appears to be losing momentum as the market isclosing the book on its worst week since early December. April gold futureslast traded at $1,338.90 an ounce, down more than 1% since last Friday.
Thesilverr market is also seeing significant selling pressure with prices fallingbelow the critical psychological level at $17 an ounce. March silver futureslast traded at $16.78 an ounce, down almost 4% since last week.
Lookingahead, commodity analysts said that in the near-term they are keeping an eye onrising bond yields and a strong U.S. dollar, both are negative for the goldmarket. However, while prospects look gloomy, there is still some hope in thatgold can hold critical levels in the near-term.
U.S.10-year bond yields pushed to a new multi-year high Friday above 2.8% after theU.S. Labor Department reported stronger-than-expected employment gains as theU.S. economy created 200,000 jobs in January. At the same time wages saw anannual increase of 2.9%, its most significant yearly rise since 2009.
Notonly did bond yields jump higher -- with some analysts now expecting yields torise above 3% eventually -- but the U.S. dollar has bounced off recentthree-year lows.
“Asyields move higher that will push the U.S. dollar up and both factors will be adrag on gold in the near-term,” said Ole Hansen, head of commodity strategy atSaxo Bank.
However,Hansen added that this is a healthy correction in gold.
“Idon’t see a collapse in gold. When the dust settles, there are still underlyingreasons to own gold,” he said.
3% Bond Yields IsNot That Scary
Althoughgold traders could see some “sticker shock” as 10-year bond yields continue torise, Maxwell Gold director of investment strategy at ETF Securities, said thathigher yields don’t necessarily mean the end for the gold rally.
“Whilebond yields are rising we see inflation and inflation expectations pick up, soreal rates are still really tame,” he said. “Low real rates will remainsupportive for gold.”
Goldadded that the U.S. dollar, while off its lows, is not seeing significantmomentum. He said that it’s surprising the U.S. Dollar Index is not higherafter what some economists have called a “stellar” employment report.
“Thisis an indication that investors are worried about growing budget deficits,” hesaid. “Ultimately, I don’t think this is a bad environment for gold.”
U.S. Dollar Up,But Not High Enough
Buttonsaid that he is also watching the U.S. dollar, saying that the index needs toend the week at a session high.
“Ifthe U.S. dollar can’t end the week on a high in this market then that isanother reason to sell it,” he said. “The data has been good for a while, butit hasn’t helped the U.S. dollar.”
LukmanOtunuga, research analyst at FXTM, said that technically the U.S. Dollar Indexstill has a way to go before it regains its bullish momentum.
“Pricesremain at risk of depreciating back below 89.00 if bulls are unable to breakabove the 89.60 level. Sustained weakness below 89.00 may invite decline backtowards 88.50,” he said.
DarinNewsom, senior analyst at DTN, said that he could see further gains in the U.S.dollar, which will weigh on gold in the near-term.
“TheU.S. dollar just looks oversold and is set to turn around for a while,” hesaid.
Equity MarketCorrection Is Supportive For Gold
Notonly are investors getting out of the bond markets as yields are inverselycorrelated to demand and prices, but higher interest rates are also spookingequity markets, according to some analyst.
TheS&P 500index is ending its worst week since February 2016 as it preparesto end the week down almost 3%.
BothHansen and Gold said that with investor capital fleeing equities and bondmarkets, alternative assets like commodities, and in particular gold, start tolook attractive.
Levels To Watch
Althoughgold is seeing renewed selling pressure, the market continues to hold criticalsupport levels. Many analysts are watching essential support between $1,325 anounce and $1,320 an ounce; a break below that area could eventually push pricesto $1,300 an ounce.
“$1,301.80is a key level to keep an eye on as it represents the 50% retracement levelfrom the previous level,” said Newsom. “That level would also represent a newfour-week low.”
On the upside, many analysts say that gold needsto push above its January high to regain its momentum.
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.