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Fed, Nonfarm Payrolls To Drive Gold Prices Next Week – Analysts

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(Kitco News) - As the saying goes: “God is in the details,” and gold investors will have a lot of details to sift through next week that will see two critical economic events.

Not only will markets have to navigate a Federal Reserve monetary policy meeting, but April employment data on Friday will also add to the volatility. However, some analysts are skeptical that the events will be able to push gold out of its range and with prices hovering at the bottom end of their range, now might be the time to buy for short-term gains.

Headline-grabbing news of rising bond yields and a surging U.S. dollar is causing gold prices to end the week in negative territory. June gold futures last traded at $1,322.80 an ounce, down more than 1% from the previous week.

“We think the landscape is very constructive for gold,” said Bill Baruch, president of Blue Line Futures. “While it’s kind of disappointing that gold is at the bottom end of the range, this is a tradable spot to buy as we look for higher prices.”

However, for gold, everything currently depends on the U.S. dollar, which pushed to its highest level since January as the U.S. Dollar Index holds above 19.50 points.

According to many currency analysts, the renewed strength in the U.S. dollar might not be sustainable because it is the result of short-term short covering as unprecedented short positioning in the greenback starts to unwind.

Many market analysts are optimistic on gold’s long-term potential as the market has been fairly resilient in the face of a stronger U.S. dollar.

“The U.S. dollar has traded to a multi-month high but gold only fell to a one-month low,” said David Madden, market analyst at CMC Markets. “A stronger U.S. dollar will weigh on gold but you will need to see a much stronger U.S. dollar before gold breaks its downtrend and I just don’t think the market has enough momentum.”

Eugen Weinberg, head of commodity research at Commerzbank said that he could see gold prices fall to $1,300 in the near-term as the U.S. dollar continues to strengthen; however, he said that he expects this level will hold as critical support.

“The depreciation in the U.S. dollar was unjustified and driven by momentum,” he said. “Now we are starting to see the market normalize. Gold could suffer in the short-term but we still see long-term potential.”

Will The Federal Reserve Help Gold Or The Greenback?

The first key risk event for gold, the U.S. dollar and bond yields will be Wednesday’s Federal Reserve monetary policy meeting; however, investors expecting to see fireworks might walk away from the meeting disappointed.

The central bank will only release a statement on its monetary policy decision; there will be no updated economic forecasts nor a press conference. Currently, the market is expecting the Fed to keep interest rates unchanged.

However, investors will have to pay attention to the details. Currently, markets are pricing in three more rate hikes for the rest of the year. The Federal Reserve sees only two rate hikes in 2018. Analysts have said that a Hawkish tone from the central bank that sets up a June rate hike could push the U.S. dollar higher and drag gold through critical support.

While a hawkish Fed is a growing risk, some analysts see this scenario as unlikely.  Ryan McKay, commodity strategist at TD Securities said that the recent wave of economic data has been mixed at best. Friday, the U.S. Commerce Department, said that the U.S. economy grew 2.3% in the first quarter of 2018.

Although the headline data was better than expected, the growth was driven by higher inventory levels and positive trade elements; neither factors point to sustainable long-term growth. Consumer consumption, which is a significant driver of the U.S. economy, increased 1.1% in the first quarter, in line with expectations.

“People are taking a second look at the health of the economy and they don’t necessarily like what they see that is supporting gold prices,” said McKay. “Weaker data will push 10-year bond yields lower, flatten the yield curve, hurt the U.S. dollar and support gold.”

Baruch also said that he also doesn’t expect that Federal Reserve will signal a faster pace of tightening at next week’s meeting.

“The data just doesn’t support more aggressive interest rate hikes,” he said.

U.S. Nonfarm Payrolls

After the Federal Reserve meeting gold investors will still not be in the clear as markets will then eagerly await the April employment numbers to be released Friday.

But again the details matter. Madden said that he will be paying more attention to wage data rather than the headline employment number.

“We are pretty much at full employment so there is not much the headline data can tell us,” he said. “I want to see if wages are going up, because that is going to impact sustainable economic growth.”

Even if the data comes out better than expected and the Federal Reserve signals three more rate hikes this year, George Milling-Stanley, head of gold investments at State Street Global Advisors, said that gold investors don’t have to fear rising interest rates.

He explained that interest rates are going up because of rising inflation, which is ultimately bullish for gold, which is seen as a hedge against higher inflation.

Earlier in the week, Jeffrey Gundlach, CEO of DoubleLine, said that he is bullish on gold as sees explosive potential that could push prices $1,000 higher once the market breaks critical resistance.

He added that inflation will continue to push U.S. 10-year bond yields above 3%, which would be positive for gold as real interest rate would remain low.

Levels To Watch

Gold has been stuck in a fairly narrow trading range since January. Ole Hansen, head of commodity strategy at Saxo Bank said that despite all the market volatility, gold prices, since the start of the year have averaged $1,332 an ounce.

On the downside the key support level to watch is the early March low at $1,309 an ounce and the January high at $1,375 an ounce.

Milling-Stanley recommended that investors ignore the near-term volatility and pay attention to the long-term uptrend as the world’s largest gold-backed exchanged-traded fund, SPDR Gold Shares (NYSE: GLD) has seen its gold holding increase by 33 tonnes this year and its net asset value increase of more than $2 billion.

The Final Say

While the Fed’s monetary policy meeting and Friday’s employment data will be the main events next week, the economic calendar is full of first-tier data that will add volatility to markets.

Kicking off the week is personal income and spending data, which will show important inflation trends in the marketplace. Markets will also receive important service-sector and manufacturing-sector sentiment data and private payrolls numbers.

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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