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Neils Christensen

Gold Could Suffer Next Week As Market Expectations Shift To June Rate Hike – Analysts

By Neils Christensen of Kitco News
Friday February 6, 2015 3:35 PM

(Kitco News) - A stronger-than-expected U.S. employment report caused gold to break below a key support level, ending the week at its lowest point since Jan. 12.

Friday, the Bureau of Labor Statistics said 257,000 jobs were created in January, beating expectations of 236,000 jobs. The data also reported strong revisions for December and November and said that wages increased 0.5% last month.

The news caused Comex April gold futures to blast below initial support at the 200-day moving average around $1,255 an ounce, eventually hitting a session low of $1,228.20 an ounce. April gold settled the week at $1,234.60 an ounce, down $48.40 or 3.77% on the week.

Although silver was dragged down by falling gold prices, it managed to hold up slightly better. Comex March silver futures ended the week at $16.694, down 46.1 cents or 2.69% on the week.

Analysts have explained that gold sold off on the news because it raises expectations that the Federal Reserve will now be in a position to raise rates as early as June. Analysts have added because it is a fairly sparse week for economic news -- with only June retail sales to be released on Thursday as the major data point --, expectations of future Fed monetary tightening will drive market direction, pushing gold lower.

Adam Button, currency analyst at Forexlive.com, said that for the moment the gold market is focused on the U.S. economy, and interest rates, which will translate into lower gold prices in the near-term. He added that he is looking for a test of the next support level at $1,221 an ounce.

“Gold’s technical picture broke down for a reason,” he said. “A June rate hike is back on the table.”

However, Button warns that the market might be too focused on the U.S. market.

“The gold market has lost sight of the global easing going on around the world. Once the market focus on that again I think gold could do well,” he said.

Along with global easing, another factor that analysts say will be important to the global gold market are growing problems in Europe as the European Union and Greece have been unable to develop a renegotiation agreement.

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Economists at Capital Economics said in a report Friday there is a growing risk that Greece exits the eurozone. This threat has been heighted since the European Central Bank announced that it would no longer accept Greek government bonds as collateral for its lending operations.

“While we are still not explicitly forecasting an exit, we think that markets are underestimating the probability of such an event,” they said.

Colin Cieszynski, senior market analyst at CMC Markets, agreed that the market is too focused on the U.S. but unless there is a new development in the negotiations, gold will continue to focus on potential changes in the Fed’s monetary policy. He added that he could see gold prices fall to $1,210 an ounce, “because we have seen a significant breakdown of the technical pattern.”

Peter Buchanan, senior economist at CIBC World Marks agreed that the near-term risks is for gold to fall lower as the U.S. economy improves, but reiterated the sentiment that there is still a lot of uncertainty in the global marketplace, which will provide some support for gold.

Economists at CIBC World Markets said that not only does Europe have to worry about a potential “Grexit” but also low economic growth and that the recent aggressive monetary action might not be enough.

“The danger for Europe is that monetary policy, however aggressive it looks with negative yields and a much weaker euro, will still prove insufficient to awaken the continent from its slumber,” they said in a report.

Buchanan added that the negative global yields should be positive for gold in the long-term. Buchanan added that he is also bullish on gold prices in the long-term because once the Fed does start its tightening cycle it will have a much lower trajectory than markets are expecting.

“I don’t think the rate hikes will be as aggressive as we have seen in the past,” he said.

By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow Neils Christensen @neils_C


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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