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Gold Bounces As Investors Doubt The Fed; What's Next For The Price?

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(Kitco News) - Gold is expected to find renewed momentum next week as the market has made a key short-term reversal due to shifting interest rate expectations, according to some analysts.

Gold is ending a five-week losing streak, seeing solid gains on the week after bouncing off a four-month low. August gold last traded at $1,227.8, up almost 1.5% from the previous Friday.

Silver is also covering from five weeks of continuous selling as it looks to recover key resistance at $16.00 an ounce. September silver futures last traded at $15.90 an ounce, up 3% from last week.

The market has been slowly recovering through most of the week, first reacting to what markets deemed were dovish comments from Federal Reserve Chair Janet Yellen during her two-day testimony before Congress.

She noted that the Fed is paying close attention to inflation and that the central bank could be close to a new low-neutral interest rate policy, meaning there could be fewer rate hikes down the road.

The precious metals saw another push higher Friday following weaker-than-expected retail sales and inflation data. Retail sales have disappointed expectations for five consecutive months and inflation has seen solid gains since February.

According to some analysts, the data hascreated more doubt in the marketplace that the Fed will be able to hike rates later in the year.

“The data just continues to be bad and that will slow the Fed,” said Bill Baruch, senior market analyst at iiTrader.com. “The Fed could still raise rates one more time this year but that is already priced into the market. The data means that the Fed will not be any more aggressive than they have already signaled.”

Phillip Streible, senior market analyst at RJO Futures, said that he expects the disappointing retail sales numbers to have the biggest impact on gold and silver in the near-term.

“I think it’s the disappointing retail sales that will eventually take down the equity markets and get the party started for gold,” he said. “It’s possible that these reports force the Fed to the sidelines.”

Streible added that he would like to see gold end the week above $1,230 an ounce and silver end above $16 an ounce to signal further gains in the near-term.

What Happened to Those Rate Hikes?

Market expectations for a December rate hike have fallen as the week ends but still remains above a key threshold. CME 30-Day Fed Fund futures are pricing in a 54% chance of a rate hike. Last week, markets were pricing in a nearly 60% chance. Traditionally, the Federal Reserve doesn’t raise interest rates if expectations are below 50%.

Expectations for a December rate hike are helping to keep bond yields off their recent lows, which Chris Vecchio, senior currency strategist at DailyFX, said will make it difficult for gold to rally.

“While the U.S. dollar has fallen following the data, yields are still holding up. In this environment, I think it makes more sense to sell the rallies on gold,” he said.

Vecchio said that he would have to see prices push above $1,240 an ounce before he turns bullish on the precious metal again.

Bill Baruch said that he remains constructive on gold as the market has made a key reversal this week, holding support above $1,200 an ounce; however, he added that investors should be careful about chasing the market at these levels.

“We are kind of in no-man’s land right now and face key resistance between $1,237 and $1,260 an ounce,” he said.

How to Play Gold in The Near Term

Baruch said that they are recommending gold investors look at buying September 1260 calls.

“$1,260 is key and I think if we can get above that then we have a shot of rallying back towards $1,290 an ounce,” he said. “We like September calls because they expire at the end of August and aren’t too expensive. There is still some value in these options,” he said.

Level to Watch
While gold is seeing a solid bounce off its recent lows, the bears haven’t completely left the woods just yet, warned analysts.
Darin Newsom, senior analyst at Telvent DTN, said that the recent downturn hasn’t completely run its course.

“I think we could be in the second wave of a three-wave downtrend,” he said. “We could see a short-term bounce to $1,240 an ounce before the market takes another downleg.”

Newsom said that gold has to push above $1,260 an ounce to regain its bullish momentum and needs to break the April and June double top just below $1,300 an ounce to resume its long-term uptrend.

On the upside, $1,240 appears to be the key resistance level to watch, according to some analysts. On the downside, initial support will be the week’s lows at $1,204 with all eyes still on $1,200 an ounce.

The Final Say

While markets are expected to continue to digest the disappointing retail sales and inflation data, there will be plenty of new economic data to focus on next week.

Data to pay attention to next week include some regional manufacturing numbers for July, housing construction data will also be released next week.

Gold investors will also want to pay attention to the European Central Bank’s meeting. While the central bank not expected to raise interest rates next week, ECB President Mario Draghi has made hawkish comments on monetary policy.

His comments have been a key reason for rising global bond yields. Analysts noted that if Draghi walks back some of his comments, bond yields could fall and that would be bullish for gold.

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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