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Gold To Be Sensitive To French Elections; Uptrend Still In place - Analysts

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(Kitco News) - While gold is expected to maintain is bullish uptrend, the market could see some short-term profit taking next week as some major risk events de-escalate, reducing investor demand for safe-haven assets, according to some analysts.

After hitting a five-month highs Monday, the gold market is headed towards a neutral close, testing a five-week winning streak. June Comex gold futures last traded at $1,288 an ounce, down only 50 cents from last Friday’s settlement price.

Silver on the other hand is seeing significant weakness as it is preparing to end the week below $18 an ounce for the first time in three week. May Comex silver futures last traded at $17.89 an ounce, down more than from the previous week.

The major event on everyone’s radar this week is the first round of French presidential election Sunday. According to analysts, gold demand in Europe has increased as euro-skeptic parties have gained traction in the polls. Currently there is a four-way race ahead of Sunday’s election:  Francois Fillo, leader of Les Republicains; Marine Le Pen of the Front National; Emmanual Macron, an independent; and Jean-Luc Mélenchon; representing Unbowed France. Currently bookmakers, who have proved more reliable than polls, give Macron a 51% chance of being the next president of France.

However, economists note that the candidate to watch will be Le Pen, who has gained in popularity. Along with promoting anti-immigration and nationalistic policies, she also supports holding a referendum on France’s membership in the European Union. Her performance in the first round would indicate rising support for a Frexit.

While the election is too close to call, Ole Hansen, head of commodity strategy at Saxo Bank, said that is it unlikely Le Pen’s anti-euro, nationalistic party will gain enough votes to become president. He said that the majority of French voters won’t put their economy at risk in support of her party.

“I just don’t see Le Pen or other extreme parties winning the election. There is too much at risk,” he said. “Whoever beats Le Pen, I think will end up becoming the next president.”

While Hansen doesn’t expect to see any surprises Sunday, if the unexpected does happen, it could be enough to push prices above $1,300 an ounce.

In an interview earlier in the week with Kitco News, Kirill Kirilenko, precious-metals analyst at CRU, a U.K.-based research firm, agreed that gold could back down in the near term as the market needs to see risk events like the French election evolve into something bigger to gain new momentum.

Simmering Uncertainty Will Be Good For Gold

Barry Potekin vice president of managed futures accounts at RMB Group, said that while France is just one risk event impacting the gold market, there is still enough uncertainty around the world to keep tensions “on the boil” and support gold prices.

“The odds are right now that the money is on further upside,” he said. “If gold prices do break through $1,300, our first target is $1,360.”

Potekin said that the key for gold investors is to watch equity markets. He noted that the price action in equities as the markets struggle to make new highs is a strong caution signal for investors.

“If equities keep going higher, then gold will suffer, but I don’t think that is going to happen. I think at current values, there is just too much risk in equities and caution is needed,” he said.

With the uptrend still in place, Potekin said that he is buying out of the money six-month calls and if gold continues to rise, he would look to add more short-term call options to his portfolio.

Hansen said that he like the idea of buying short-term puts to play a potential short-term correction. He added that he is watching support band between $1,257 and $1,255.

Don’t forget about the U.S. dollar

While gold could be sensitive to shifting risk sentiment in the marketplace, analysts are also warning investors to pay close attention to the U.S. dollar, especially ahead of the European Central Bank meeting Thursday.

While the ECB is expected to maintain its easing bias to justify its continued asset-purchase program, Hansen said that ECB President Mario Draghi will probably have to address the recent improvement in the European economy, which could strength the euro.

“The euro has the biggest impact on U.S. dollar strength so any rally in the euro would be positive for gold,” he said.

Analysts at iiTrader noted that gold could win with either a weaker euro, as it would drive safe-haven demand, or a stronger euro, which would signal U.S. dollar weakness.

Currency analysts at Brown Brothers Harriman said that they continue to expect to see further gains in the U.S. dollar, despite a drop in the first three months of the year. Widening interest-rate differentials between the U.S. and other central banks continue to support U.S. dollar strength, they said in a recent report.

After some weakness at the start of the month, markets are once again pricing in a more than 50% chance of a rate hike in June. Traditionally, the Federal Reserve has not hiked interest rates when market expectations are below this level.

However, CME 30-day Fed fund futures are showing some hesitancy for a third rate hike, pricing in only a 37% chance that interest rates will end the year in a range at least between 1.25% and 1.50%. 

Levels to watch...

Investors are keeping an eye on gold’s 200-day moving average, which comes in at $1,266.50 an ounce. It appears that gold is holding initial support above $1,281 an ounce, which represents the 61.8% retracement level from the highs seen in July to the December lows.

Another level technical analysts are watching is $1,258 an ounce, the 61.8% retracement level between the March low and gold’s five-month high, hit at the start of the week.

Chris Beauchamp, market analyst at IG, said that he could see gold prices fall back to $1,253 an ounce and still maintain its bullish uptrend.

“It seems that we will continue to see gold weaken, with the pullback in a broader uptrend still playing out,” he said. “Bulls will need to wait until we see the price move back to $1,253 and the 200-day simple moving average (SMA), or even down to the rising trendline around $1245. 

The Final Say...

While investors will be keeping an eye on market sentiment and the French elections, there will be a full docket of U.S. economic data to add volatility next week.

The week starts off with U.S. consumer confidence data to be released Tuesday along with new home sales figures.

Later in the week the U.S. manufacturing data will be in the spotlight with the release of durable goods sales numbers. Finally the week ends with the advance reading of first-quarter gross domestic product.

Besides the ECB monetary policy announcement, the Bank of Japan will meet early Thursday.

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.

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