Investors Stuck In The Middle With Gold Next Week; Fed, Employment On Tap
(Kitco News) - Although gold is showing some resilience by holding strong support at its 200-day moving average, its downside potential could be tested next week as the market faces major hurdles, including a Federal Reserve monetary policy meeting and employment numbers.
The gold market is preparing to close in negative territory for the first time in five weeks. June Comex gold futures last traded at $1,268.70 an ounce, down 1.6% compared to last Friday’s settlement
At the same time silver is seeing its second consecutive week of strong losses. May Comex silver futures last traded at $17.180 an ounce, down almost 4% from the previous week.
Ole Hansen, head of commodity strategy at Saxo Bank, who is neutral on gold in the short term, said that the market appears stuck as simmering geopolitical uncertainty provides a base of support for gold but rising bond yields on growing U.S. interest rate hike expectations keeps a lid on any significant rally.
Hansen added that not only are there fundamental reasons limiting gold’s upside potential, but the market also faces some seasonal factors.
“In the last five years, May is seen as the worst month for gold,” he said. “For gold to rise, we need to see bond yields to fall and the yen to find some teeth against the U.S. dollar, and those two things just aren’t happening right now.”
The Meeting That Markets Forgot
While all the recent focus among investors and analysts has been on whether or not the Federal Reserve will raise interest rates in June, markets have basically ignored the quickly approaching May monetary policy meeting. According to some commodity analysts, this meeting could set the tone for gold for the next month.
If the Federal Reserve strikes a hawkish tone at the meeting, gold could end up falling until the June meeting, further establishing its pattern of selling off ahead of rate hike, only to rally directly after the decision.
However, there is some uncertainty as to whether the Fed can strike a strong hawkish tone, especially after first-quarter gross domestic product showed that the U.S. economy only grew 0.7%, its worst first-quarter performance in three years.
“The Federal Reserve is kind of stuck in between weak growth and rising inflation,” said Colin Cieszynski, senior market analyst at CMC Markets Canada. “I am actually bullish on gold next week in part because I think the Fed will try to hedge its bets but will ultimately sound dovish to the market.”
Hansen said that while there is a risk that gold moves lower following the Fed meeting, June expectations are high enough that there really isn’t anything the Fed can say to solidify expectations any further.
What Do The Markets Say?
Currently CME 30-Day Fed fund futures are pricing in a more than 70% chance of a rate hike in June. At the same time, markets see a more than 50% chance of a third 25-basis-point hike in December.
Looking to next week, markets see a 5% chance of a rate hike.
Employment Week To Impact Gold
While analysts will be perusing next week’s Fed statement, they will also be keeping a close eye on Friday’s nonfarm payrolls report. Currently economists are expecting to see job gains of around 200,000. However, last month estimates were around the same for gains of 200,000 jobs and the data massively disappointing, showing gains of 98,000 jobs.
Geopolitical Risks Continue to Support Gold Prices
Although gold’s upside potential could be limited next week, analysts are not expecting to see a major selloff in the near term.
Analysts note that there are enough geopolitical tensions in the world to encourage investors to hold a core position in gold.
Heading into the weekend, the U.S. government is once again taking a tough stance against North Korea. In New York at the United Nations, U.S. Secretary of State Rex Tillerson called for tougher economic sanctions against the totalitarian regime.
Earlier in the day, President Donald Trump said that there is a chance of a “major, major conflict with North Korea.”
“It’s is difficult to be bearish on gold when there is a potential for a massive conflict,” said Jasper Lawler, senior market analyst at London Capital Group.
Despite Geopolitical Risks, Technicals Point Lower
Despite the simmering support for gold, Lawler added that he is expecting to see modestly lower prices next week as prices earlier this week pushed below its 20-day moving average, which comes in at $1,270 an ounce.
Because of near-term bearish technical momentum, Lawler said that he could see prices fall to $1,240 an ounce. Lukman Otunuga, analyst at FXTM, is also looking for prices to fall to $1,240 an ounce, if current support levels break.
Darin Newsom, senior analyst at Telvent DTN, said that he is also expecting to see some selling pressure next week.
“It looks like the weekly chart is creating some sell signals for next week and I wouldn’t be surprised if gold tested support at $1,230 an ounce. But with so much uncertainty, I have difficult seeing prices much lower than that.”
The Final Say
While the Federal Reserve decision Wednesday and employment numbers at the end of the week will be the two main events, there will be a bevy of economic data for markets to chew on.
Monday markets will receive Institute for Supply Management manufacturing data, and midweek will be the ISM service-sector data as well as private-sector employment numbers.