All Eyes On $1,200 For Gold Next Week - Analysts
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(Kitco News) - Gold’s uptrend since the start of the year could be at risk next week with growing expectations that prices will test key support levels, according to some analysts.
The gold market is on its way to another negative close as what has been described as a “solid” employment report pushed prices below initial support at $1,220 an ounce. August gold last traded at $1,209.10 an ounce, down more than 2% from last Friday.
Gold has closed in negative territory for five consecutive weeks. With renewed momentum to the downside, analysts have said that there is a risk that gold drops to key support at $1,200 an ounce in the near term.
Silver is also suffering from significant downward pressure as the market tries to recover from a flash crash seen overnight. July silver futures last traded at $15.620 an ounce, down 7.5% from last week. This is the metals fifth consecutive week of losses.
“There is no immediate demand for gold right now and I think that a break to $1,200 will be imminent,” said Jasper Lawler, senior market analyst at London Capital Group.
Lawler added that he would ultimately like to see a major flush of the gold market, driving prices to $1,170 an ounce. From there, the market could reestablished a long-term uptrend, he said.
“If you are a gold investor, I don’t think you have to rush into the market. You can wait for better prices,” he said.
Christopher Vecchio, senior currency strategist at DailyFX.com, is also looking for lower prices in the near-term. He noted that the yellow metal is entering a very difficult environment as the market grapples with low inflation risks in a rising interst rate environment.
“We are seeing real rates go up and that is raising gold’s opportunity costs,” he said. “With low inflation risks, gold’s core appeal as an inflation hedge is weakening.”
Weak Wage Growth Could Be Gold’s Saving Grace
While weak inflation is traditionally negative for gold, in this case, some analysts see it as a positive.
The minutes of the June Federal Open Market Committee meeting, which were released Wednesday, noted a growing divide on inflation expectations. “Several participants expressed concern that progress toward the Committee’s 2 percent longer-run inflation objective might have slowed and that the recent softness in inflation might persist,” the minutes said.
While bearish on gold, Lawler said that the latest wage growth data, which showed annual wage growth at 2.5% in June, could “muddy” the inflation waters and keep the U.S. central bank from aggressively tightening.
Lukman Otunuga, currency researcher at FXTM, also noted that weak inflation data could ultimately help gold find some support next week.
“Gold may be supported if concerns of weak wage growth fuels fears that the period of low inflation in the U.S. could be more than ‘transitory’. With anxiety over lower wage growth and ongoing inflation expectations possibly leading to more conflicting messages from the Fed over the pace of future interest rates, gold bulls still have a chance to make a comeback,” he said in an email to Kitco News. “In the near term, the yellow metal remains pressured on the daily charts and a break below $1,214 could encourage a further decline towards $1,200.”
Maxwell Gold, director of investment strategy at ETF Securities, said the weak wage growth is part of the overall picture that the U.S. economy is not significantly reflating. He added that this could keep the Federal Reserve from aggressively normalizing its monetary policy.
“Low inflation is a headwind for gold but overall, I think the path of normalization is paved with volatility and that will be good for the metal in the long run,” he said.
What Will Yellen Have To Say On Low Inflation
The key event next week will be Fed Chair Janet Yellen’s semi-annual testimony before Congress Wednesday and Thursday. She has been fairly optimistic on the U.S. economy, noting modest growth. At the same time, she has dismissed low inflation concerns as “transitory.”
According to analysts, precious metals markets will be sensitive to Yellen’s comments on rate hikes as well as a looming decision on shrinking the central bank’s massive balance sheet. She has previously stated that the central wants to start reducing its balance sheet “really soon.”
Markets See Growing Risk Of A December Rate Hike
The stronger-than expected June jobs report, which showed that 222,000 jobs were created last month, has helped push interest-rate expectations to nearly a two-month high. CME 30-Day Fed Fund futures are pricing in a more than 60% chance of a 25-basis point move by the end of the year.
In anticipation of further monetary policy tightening, U.S. 10-year bond yields have pushed to a two-month high at around 2.39%.
Levels to Watch
According to most analysts, the only key level to watch next week will be $1,200 an ounce. If that level holds then gold’s uptrend, since the start of the year, remains intact.
While the U.S. dollar index has been a good indication of gold’s direction, the correlation is breaking down. Gold has seen little benefit from a relatively weaker USD Index, which has been hovering around a seven-month low. Analysts have noted that the greenback is being pressured by a stronger euro as markets price in more European Central Bank tightening.
Several analyst have said that because of this factor, if investors want to know where gold is headed, they should watch the Japanese yen, which is suffering sharp losses against the U.S. dollar.
“The dollar is skyrocketing against the yen and that will be another negative for gold,” said Lawler.
The Final Say
While Yellen will be in the spotlight next week it is not the only central bank to take center stage. The Bank of Canada will release its latest monetary policy decision and there is growing expectations that the central bank could raise interest rates for the first time in a decade. The Bank of Canada’s decision highlights the growing trend of global monetary policy tightening.
The week ends on a strong note with the release of June U.S. retail sales data and the Consumer Price Index.