Ignore Gold; Analysts Watching To See If Silver Can Bounce Higher Next Week
This historic quote sums up the price action investors have seen in the silver market: “The market can stay irrational longer than you can stay solvent” - John Maynard Keynes.
(Kitco News) - With U.S. economic data not expected to sway the markets’ high expectations for a June rate hike, anlaysts say that gold could be sensitive to further selling presure as the U.S. dollar and equity markets remain elevated.
After hitting its lowest point in eight week, the gold market managed to bounce back and end the week slightly in positive territory. June Comex gold futures settled Friday at $1,227.70 an ounce, a gain of 0.6%, but it was enough to stop a two-week losing streak.
However, in a relatively quiet marketplace, it is silver that is gaining a lot more attention as prices dropped to their lowest point since the start of the year. In the last three week silver went from one of the best performing financial assets in markets to giving up almost all of its gains. July Comex silver futures settled Friday at $16.425 an ounce, up almost 1% from the previous week. However, the grey metal is up only 3% on the year.
Many market participants have noted that silver price doesn’t match its fundamental outlook. Thursday in its World Silver Survey report, research firm GFMS noted that silver production declined for the first time in 14 years. Randy Smallwood, CEO of Wheaton Precious Metals said in an interview with Kitco News that the market is acting irrational and he things ultimately that prices will rise in the long-term as the market sees a supply deficit for the next four or five years at least.
Fawad Razaqzada, technical analyst at City Index, said that while silver could continue to push lower in the near-term, he likes the current price as a strategic investment.
“I think silver is at a great level for a long-term investment,” he said.
Phillip Streible, senior market analyst at RJOFutures, said that while silver looks enticing at these levels he is not convinced that now is the time to jump in. He noted that market compliancy, that is driving risk sentiment is weighing on the precious metals markets.
“The gold:silver ration is not at extreme levels. They are at distorted levels but not extreme,” he said. “I would wait for the gold:silver ratio to hit 80 and then I think we will see it collapse as silver catches up to gold.”
Gold To Remain Hum-Ho In The Near Term
While gold’s push off an eight-week low is creating some bullish sentiment in the marketplace, analysts are not overly optimistic for gold.
“It’s not surprising that we are seen a bounce in gold. It was bound to happen,” said Razaqzada. “But you can’t ignore the strength of the U.S. dollar and equity markets. These will continue to hurt gold and silver.”
Razaqzada, said he could see the yellow metal pushing to its 200-day moving average at $1.258.60 an ounce before being hit with renewed selling pressure. Until the sentiment in the marketplace changes, investment demand for gold will be lackluster, he added.
“Indices are extremely overbought and a correction is coming but at the moment it is not anywhere in sight,” he said.
Investors Might Have To Wait Until The Rate Hike Before Gold Rallies
Analysts also note gold will also continue to suffer with the Federal Reserve expected to raise rates in June.
CME 30-day Fed Fund futures are pricing in a 74% chance of a rate hike, with expectations falling from recent highs following disappointing retail sales numbers and a weaker-than-expected Consumer Price Index for April.
“I think gold’s rally will have to wait until after the Fed rate hike. The Fed will raise rates and then signal that is it for the rest of the year and gold will rally,” said Streible. “I am pretty much out of gold until after the Fed meeting or unless we see major resistance levels break.”
Levels To Watch
Streible said that despite some optimism in the marketplace, he can’t get excited about gold unless prices push above $1,250 an ounce, representing the 50-day moving average.
Bill Baruch, senior market analyst at iiTrader said that he expects rallies will be sold unless prices can push above $1,247 an ounce, which presents a trend line from the December and March lows.
On the downside many analysts will be watching to see if initial support at $1,225 an ounce will hold. Razaqzada said that if this level breaks then there is a good chance prices will fall back to $1,200 an ounce.
The Final Say
While U.S. economic data won’t shift market expectations for a June rate hike, they could create some much needed volatility in the marketplace.
Investors will receive U.S. housing starts and building permits data for April and some regional manufacturing data.