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U.S. Dollar Weakness Will Be Key For Gold’s Recovery Next Week – Analysts

(Kitco News) - With the European Central Bank monetary policy meeting now in the rear-view mirror, analysts now say investors need to keep an eye on the U.S. dollar as this will have the biggest impact on gold prices next week.

analysts say U.S. dollar weakness will be key to gold's continued recovery.“There is a lot of major U.S. reports coming out next week and if the data is positive then there is no reason why the U.S. dollar can’t go higher and that could hurt gold,” said Chris Beauchamp, senior analyst at IG.

However, with gold posting its first positive weekly close in three weeks, many analysts suspect that the correction --which started with a 5% drop at the start of the month -- has run its course. December gold futures last traded at $1,265.70 an ounce, up 1% since Monday’s open.

Silver is not seeing the same interest as December futures last trade at $17.475 an ounce, relatively flat since Monday.

Ole Hansen, head of commodity strategy at Saxo Bank, said he sees some positive signs for gold, even in the face of a stronger U.S. dollar. This week, the U.S. Dollar Index rallied 0.55% with prices hitting 98.66, its highest point in seven months.

“U.S. dollar strength is a concern but ultimately, there is underlying strength in the gold market,” he said.

Hansen added that he is a bit concerned that there is no bigger broad-based rally in the precious metals market. He noted that platinum’s discount to gold continues to widen along with the gold-to-silver ratio. However, he noted that investors might just be biding time before jumping in; a push above $1,270 an ounce in gold could spur demand in other metals..

Although gold prices could lose some ground in the near-term, Phillip Streible, senior market strategist at RJO Futures, said that he thinks the floor is set.

“We’re not going much lower because markets have pretty much priced in U.S. interest rate hikes,” he said.

Forget About November, All The Action’s In December

According to CME 30-Day Fed Fund futures, the November Federal Open Market Committee meeting is going to be pretty much a non-event with markets pricing in only a 9% chance of a rate hike.

Being only a few days before the U.S. presidential election, many analysts are not expecting the Federal Reserve to rock the boat.
However, expectations for a December move jump to 75%, the highest it has been all year.

How To Trade The Market

Streible said that he expects gold to rally following the December monetary policy meeting, similar to the move seen at the start of 2016 that ultimately drove gold prices up 30%.

In this environment, he said that he likes the idea of buying short-term protective puts with a strike price at around $1,225, which is seen as a support level in the short-term correction. As prices near support, he then said that investors could start to go long gold futures.

He added that $1,300 call options past December also look attractive.

Key Levels To Watch

Although gold is attracting some bargain hunters, some analysts warn that that the correction isn’t quite finished yet.

Beauchamp said that traders and investors still need to pay attention to support at $1,250, adding that the market is on the “verge of ending this correction phase.”

Commodity analysts at iiTrader said that gold needs to push above the 200-day moving average, which comes in at $1,269.70 an ounce, before the market attracts new momentum.

Technical analysts at Commerzbank said in a recent report that gold could see a near-term rebound to $1,293; however, they continue to recommend selling rallies as the outlook still looks bearish.

The Final Say…

The U.S. economic calendar is fairly busy next week andthe main event comes on Friday with the first reading of third quarter U.S. gross domestic product. Economists expect that the U.S. economy expanded by 2.5% in the third quarter, up from 1.4% growth seen in the second quarter.

Another major report that could create some volatility for the U.S. dollar and gold will be the Conference Board consumer confidence report for October, coming outTuesday.

Other data to watch include September’s durable goods data, September new home sales, and preliminary manufacturing numbers.

The week also starts with a heavy slate of Fed head comments with New York Fed President William Dudley, St. Louis Fed President James Bullard and Fed Governor Jerome Powell all speaking during the day.

However, analysts noted that with such high market expectations, there is not much that the Federal Reserve members can say that will be surprising.

 

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

 

 

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