Kitco News Weekly Outlook: Where Are Gold Prices Heading - Flip A Coin, Analysts
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(Kitco News) - While there is still substantial bullish sentiment in the gold market, analysts are recommending investors taking a more cautious stance next week as prices are caught in the middle of a near-term trading range.
According to many analysts, gold’s short-term technical is stuck in neutral territory; prices can just as easily fall to $1,300 an ounce, as they could rise back to test resistance at $1,360 an ounce.Â April gold futures last traded at $1.331.50 an ounce, down almost 2% from the previous week. The selloff comes after the yellow metal rallied more than 3% last week, its best percentage gain in almost two years.
It’s not just gold that is suffering; silver prices were also dragged lower, last trading at $16.55 an ounce, down almost 1% since last week. The market continues to struggle as prices are unable to break above key resistance at $17 an ounce.
Analysts said that gold’s correction after the failed breakout above $1,360 is not a significant surprise. But the question to answer now: does the market have further to correct before it pushes higher?
“I maintain my positive outlook for gold. If you think the global economic growth looks shaky, then you want to own some gold,” Ole Hansen, head of commodity strategy at Saxo Bank. “But I think you need to play gold cautiously and wait for the breakout."
In the near-term, he said that investors need to brace for gold prices to drop to $1,300 an ounce as U.S. bond yields and the U.S. dollar push higher.
Greg Harmon, president of Dragonfly Capital, described the gold market as floundering for direction in an environment of zero momentum.
“If I were asked how to trade this market I would say: ‘Don’t and look for something else to trade,’” he said.
Fawad Razaqzada, technical analyst at City Index, said that while gold’s technical outlook is unclear, he said that he thinks the risks are skewed to the downside as he expects the U.S. dollar to find some momentum in the near-term. He added that the U.S. dollar’s recent bounce off a three-year low could represent long-term support.
“I am bullish on the U.S. dollar, so I guess I’m bearish on gold,” the analyst said. “The U.S. dollar looks oversold and fundamentals don’t support these lower prices.”
U.S. Dollar Remains The Biggest Threat To Gold
According to analysts, gold will remain at the mercy of the U.S. dollar, which could -- according to analysts at Bank of America Merrill Lynch -- rally about 2% from current levels. The analysts noted that further Federal Reserve monetary policy tightening should continue to support the U.S. dollar through 2018.
“After the aggressive ECB repricing, we think that relative monetary expectations will cease providing cyclical support for EURUSD for now. Attention should shift to accelerating US growth,” the analysts said. “Our US economics team now expects US growth of 2.9% this year and three Fed hikes, followed by three in 2019. The market is still priced below this.”
Razaqzada, also expects the U.S. dollar to rally as markets start to focus on interest rate hikes, which are expected to come as soon as March 21. Currently markets are pricing in a 83% chance of a hike next month. The market see 60% chance of at least three rate hikes by the end of the year.
“The Fed is going to continue to raise interest rates and that is the only thing that matters right now,” he said.
However, not all analysts are optimistic that the U.S. dollar can break above important resistance between 90 points and 91 points. The U.S. Dollar Index last traded at 89.82 points.
While interest rate hikes support a higher U.S. dollar, markets are ignoring growing deficit risks, said Christopher Vecchio, senior currency strategist at DailyFx.com.
“Credit risks are not being discussed and that I think is a big mistake,” he said. “We could see a credit rating downgrade this year because of growing deficits and that will be dollar negative.”
In this environment, Vecchio said that it makes sense for investors to diversify their equities holding and buy gold as a defensive asset.
“This is a good time to buy gold, given the rising credit risks ahead,” he said.
Although gold has been unable to break through resistance at $1,360 an ounce, Vecchio said that the market has been resilient as bond yields have pushed to four-year highs. Traditionally, higher bond yields are negative for gold as it raises the precious metal’s opportunity costs.
The fact that gold is holding critical support levels as yields push to 3% is a sign that there are bigger factors in play. This could be a sign that we are seeing the start of a regime change in financial markets.”
How To Trade This Gold Market
With Gold trapped in the middle of its range, analysts recommend that investors and traders remain patient and look to establish long-term positions on dips.
Razaqzada said that while $1,300 looks like an attractive entry point, he would need to see signs that “sellers are getting trapped and that support is being bought.”
As to what could get gold finally over the $1,360 wall, analysts say that further weakness in equities needs to drive safe-haven demand.
In a more cautious move, Harmon said that investors could buy long-term call options as a low-risk option to capture long-term gains.
New Fed Head Speaks
Although gold prices could fall either way next week, the market could find some vital support as new Fed Chair Jerome Powell testifies before Congress to discuss the central bank’s semiannual monetary policy report.
Markets will be paying close attention to what the new Fed head has to say about rising inflation and the nation’s economic growth prospects.
However, Vecchio warned that investors expecting to hear hawkish comments from Powell would walk away disappointed. He said that he expects Powell will toe the line established by his predecessor Janet Yellen.
“Volatile is on the rise and traditionally the Fed has been supportive of markets during periods of higher volatility,” he said. “Historically speaking, no Fed Chair has announced a shift in policy in front of Congress.”
The Final Say
While the spotlight will be on Powell’s testimony Wednesday, the U.S. economic calendar picks up with the release of home sales data for January, manufacturing data, consumer confidence and the second reading of fourth-quarter gross domestic product data.