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Will Investors Finally Say ‘Enough’ After Major Gold Selloff?

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Will Investors Finally Say ‘Enough’ After Major Gold Selloff?

(Kitco News) - Analysts are struggling to pinpoint gold’s future direction after prices hit a 12-month low earlier this week, yet many agree that the yellow metal is oversold and is due for a rebound.

Gold prices continue to trade under heavy pressure on Friday, closing down what was a very tough week, where gold saw all of its year-to-date gains erased while ignoring escalating trade tensions and weaker than expected Q1 U.S. GDP data.

Analysts are still puzzled as to why gold -- a safe-haven asset -- is failing to attract investors at such a low price and amid unstable geopolitical environment.

All have explanations, pointing to rising U.S. dollar and hawkish Federal Reserve, but most are still taken aback by gold’s weakness.

“The move down in gold prices was a bit more than we expected. It was surprising that despite trade tensions, the only safe haven that didn’t benefit was gold,” Capital Economics analyst Simona Gambarini told Kitco News on Friday.

The U.S. dollar index touched a one-year high this week, nearing 95.50, while August Comex gold futures tumbled below $1,248 and came close to 12-month lows.

“Dollar has wind in its sails,” Mitsubishi analyst Jonathan Butler said, noting that he was surprised that “gold did not benefit at all from concerns around trade war between the U.S. and China. And trade wars in more generally between the EU and the U.S.”

One of the reasons why the U.S. dollar has been stealing all of the safe-haven attention is market’s perception that a trade war will narrow the U.S. trade deficit because of less trade with the rest of the world, which in return will strengthen the U.S. dollar, according to Butler.

“There are good fundamental reasons to believe gold should be doing better, but those are being outweighed by macro sentiment and a stronger dollar,” he said.

Gambarini noted that aside from higher U.S. dollar weighing on precious metal’s prices, futures market has also been bearish to gold. “A lot of investors have liquidated their positions or turned short on futures markets, which could have exacerbated the move down,” she explained.

Some Positive Sings For Gold Prices

Gambarini does not see prices falling much further from where they are now, but adding that a higher U.S. dollar will always cap any potential gains from trade war rhetoric.

Butler, on the other hand, is bullish on gold at these level. “The rising inflation should be positive for gold and also there has been two or three straight weeks of selling now and with positioning quite negative, this could be the time investors say ‘enough already’,” the analyst said. “Gold at $1,250 looks pretty cheap all things considered.”

A clear positive sign for gold came at the end of this week, when the U.S. dollar index retreated 0.80% on the day back to 94.62, giving some reprieve to precious metal’s prices.

Another bright spot for gold has been rising inflation in the U.S., which is good for the yellow metal that is traditionally bought as an inflation hedge.

U.S. consumer prices saw an acceleration in May, with the Commerce Department stating on Friday that a measure of underlying inflation hit the Federal Reserve’s 2% target for the first time in six years, Butler pointed out.

On top of that, he said that lower prices could boost gold purchases out of China, the number one consumer of gold in the world. “The other thing we tend to see at times like this is China buying efficiently,” Butler said. “If prices were to go below $1,250, we’ll start to see a response in the Far East.”

Levels To Watch

Butler highlighted that gold prices have been hitting a succession of lower lows and that the $1,240 is a significant test.

“We are really hitting the bottom part of the uptrend that we’ve seen in the back of 2015. Very close to now breaching that key technical level, coming in at around $1,240. If we can hold it, the longer term uptrend will remain intact,” he stated. “Gold could stage a bit of relief rally if the dollar doesn’t continue to move higher.”

TD Securities commodity strategist Ryan McKay said he is monitoring the $1,240 level on the downside and $1,255-$1,260 on the upside. McKay added that he is neutral on prices next week.

Chief market strategist at SIA Wealth Management Colin Cieszynski is slightly bearish on prices, noting that gold would bottom out around the $1,240 level and will likely stick around the $1,240-$1,260 an ounce range.

“Gold won’t break $1,240,” he said. “The metal is oversold … and $1,260-65 [will serve] as resistance.”

Be Aware Of Exaggerated Moves Next Week

Thin trading volumes due to a short holiday week in the U.S. and Canada could lead to wild and exaggerated moves on the marketplace. And some analysts are telling investors not to take it to heart, as those moves will likely unwind quickly.

“The Canadian holiday on Monday is not that relevant, but the U.S. holiday on Wednesday when everyone is closed will probably lag into the weekend, so I expect a very thin market coming into the close on Tuesday through the balance of next week,” Kitco’s global trading director Peter Hug said. “Thin markets can be moved and can have exaggerated moves, so that’s one of the things you need to look out for.”

Key Data

Big news next week will be the Federal Reserve minutes from the June 13 meeting, scheduled for the release on Thursday, and the U.S. nonfarm payrolls from June, set to be published on Friday.

Analysts will be carefully examining Fed’s language, to see if Fed Chair Jerome Powell was as hawkish as markets interpreted him to be when the central bank hinted at two more rate hikes this year.

“It would be interesting to have a read and see if the language used have changes and what we can gather on inflation and interest rates for the remaining for the year,” Gambarini pointed out. “If there was any indication that the Fed was worried about inflation that would be positive for gold prices.”

McKay added that the U.S. jobs data will give markets an insight look into how strong the economy really is and if Fed’s hawkishness is really “warranted.”

Meanwhile, trade policy will remain in focus for traders, with the rollout of the first round of tariffs on China this coming Friday. Gambarini warned that this event could “weigh on the markets and give boost to the dollar.”

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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