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Gold To Shine Next Week As Political Risks Remain

Kitco News

(Kitco News) - In a relatively quiet week for economic data, gold prices could continue to push higher, driven by ongoing political drama in the U.S., according to analysts.

Gold prices are seeing solid gains for the week, supported by weaker U.S. equities and the worst performance in the U.S. dollar in more than a year. June Comex gold futures settled the week at $1,253.60 an ounce, up 2% since last Friday.

The silver market is also seeing strong gains for the week as it has managed to bounce further off last week’s four-month low. July Comex silver futures settled Friday at $16.796 an ounce, up 2.4% from last week.

Looking ahead, analysts remain bullish on gold in the near-term as financial markets remain sensitive to the growing turmoil in Washington D.C.

“An awful lot of sentiment has to blow over for the political risk in the U.S. to die down,” said Colin Cieszynski, senior market analyst at CMC Markets. “And I just don’t see that happening.”

Negative for gold is that fact that next week President Donald Trump will attempt to create a fresh narrative by going on his first foreign trip, which includes stops in Saudi Arabia, Israel, the Vatican and ending with a NATO meeting in Belgium. However, his message could potentially compete with former FBI Director James Comey’s testimony Wednesday before the House Oversight and Government Reform Committee.

“Comey’s testimony is the biggest risk for markets next week,” said Adam Button, currency analyst at Forexlive.com.

In a recent interview with Kitco News, Maxwell Gold, director of investment strategy at ETF Securities, said that investors are paying more attention to the political drama because it is starting to impact expectations of proposed fiscal stimulus spending and tax reform.

Gold said that investors are losing patience with the Trump administration as it continues to be distracted with ongoing allegations of colluding with Russia during the 2016 election, instead of pushing its economic proposals.

“Risks of further delays in fiscal stimulus and tax reform are coming to fruition,” he said. “The exuberance seen in equity markets is starting to unwind because investors are losing patience and that will be good for gold.”

Button also sees political risk benefiting gold in the near term.

“Anytime you have political risk, gold will benefit. Right now, the political stakes couldn’t be higher.”

Technicals Look Good For Gold

Not only will U.S. political uncertainty provide some support for gold, its technical outlook is generating a very bullish signal, said Cieszynski. 

He explained that gold’s 50-day moving average is close to pushing above the 200-day moving average, creating a bullish technical pattern called a Golden Cross.

“This is an important confirmation of a major uptrend in gold. You’ve had a solid correction and now the price is back above its average,” he said.

Don’t Forget About The Fed

While a lot of attention will be focused on Capitol Hill, investors shouldn’t forget about the Federal Reserve's minutes from its May meeting to be released Wednesday.

Cieszynski said that the release of the minutes will creat renewed interest in the June monetary policy meeting, which could be a headwind for the yellow metal.

Markets are pricing in a 74% chance of a rate hike following the June monetary policy meeting. However, while a June move is baked into markets, it could be the last move this year. Markets are pricing in only a 44% chance of a third rate hike by December. Historically, the Federal Reserve never raises interest rates when expectations are below 50%.

"While the gold price is likely to remain well supported over the coming weeks as the Trump scandal unfolds, investors’ focus should soon return to the Fed and the prospect of a June rate hike," said commodity anaylsts at Capital Economics.

If gold does selloff, Cieszynski said that it could just create a buying opportunity as he expects a June hike will be another dovish move -- similar to what markets saw in March when the central bank raised interest rates but highlighted a lower trajectory as it normalization its monetary policy.

Levels To Watch

Gold is ending the week near initial resistance coming in at its 200-day moving average at $1,255.50 an ounce. At the same time, initial support comes in at $1,250.20, which is the 50-day moving average.

Cieszynski said that he sees strong support for gold between $1,212 and $1,220 an ounce, with resistance at $1,260.

Button said that if gold can get back to last week’s high of $1,265 then he would expect to see a rally back to last month’s high at $1,290. On the downside, he said investors will start to re-question gold’s strength if prices push below $1,220 an ounce.

Chris Beauchamp, market analyst at IG, said that he remains bullish on gold in the near-term as long as prices remain above $1,240 an ounce.

“It is likely that we will see buyers return, with a push back towards $1264 and higher, opening the way to $1280 and $1300,” he said.

The Final Say

Comey’s potential testimony to the House Oversight Committee remains the key risk event next week, following the release of the Federal Reserve minutes.

Other important economic reports to watch next week include home sales data, preliminary manufacturing numbers and the second reading of first quarter U.S. gross domestic product.

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 precious metal products, 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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