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Weekly Gold Outlook: Prices Have Room To Move Higher Near-Term

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(Kitco News) - Weak inflation pushed gold to nearly three-week highs Friday and momentum will likely spill over into next week, according to analysts.

Ending a four-week losing streak, the gold market spiked above $1,300 at the start of the North American trading session, in reaction to disappointing Consumer Price Index data. While gasoline prices pushed headline inflation to an annual rate of 2.2% -- the highest reading since April -- core CPI inflation, which strips out energy and food prices, remained unchanged at 1.7%.

This is the fifth month in a row that inflation has remained at the low end of this year’s range, falling from a high of 2.3% seen in January.

December gold futures last traded at $1,303.20 an ounce, up more than 2% since last Friday. At the same time, silver is seeing its second week of gains, last trading at $17.38 an ounce, up almost 3% from last week.

Why Is Everyone So Caught Up on Inflation

Analysts told Kitco News that the latest inflation data is good for gold because it creates some doubt around the Federal Reserve’s monetary policy action.

While a December rate hike is seen as a sure thing, the latest inflation data adds some uncertainty that the Fed will be able to aggressively hike interest rates in 2018.

“I believe we will see Gold higher next week,” said Bill Baruch, president of Blue Line Futures. “Yes, the Fed will be able to continue to tighten but the path is priced in and the growth landscape that eludes to this path is not speeding up.”

The inflation data came as Fed members were concerned about weak prices pressures. The minutes of the September Federal Open Market Committee meeting, released Wednesday, said that “many participants expressed concern that the low inflation readings this year might reflect not only transitory factors, but also the influence of developments that could prove more persistent.”

But Wait, There’s More…

Lukman Otunuga, research analyst at FXTM, said that a re-evaluation of interest rates is positive for gold as it is also impacting the U.S. dollar. He added that the greenback has collapsed like a house of cards following the inflation data.
“Gold bulls could be instilled with enough inspiration to send prices higher, if the dollar continues to depreciate,” he said.

“From a technical standpoint, a daily close above $1300 may encourage a further incline towards $1320,” he added.
Maxwell Gold, director of investment strategy at ETF Securities, also sees room for gold prices to move higher in the near-term; however, he added that prices are more likely to fall back to $1,250 an ounce as markets prepare for the final rate hike of the year.  

One strategy for gold traders

While bullish sentiment is picking up, not all analysts are convinced that gold can maintain its current momentum with an environment of raising prices.

Phillip Streible said that the Fed is looking past the inflation data and there is a risk that the central bank increases its rate hike pace more so than what the market has priced in for 2018. He added this fear could weigh on the gold market.

“There is nothing in the marketplace right now that justifies a move back to the contract highs,” he said. “I could see $1,300 as a new channel and trade $20 either side of this level.”

However, he added that he does see a floor in the market and recommends selling December $1250 put options.

“If you sell a put, you are picking the price you want to be long at,” he explained.

Let’s Get Technical

While gold has pushed to the key psychological level of $1,300 an ounce, the major resistance level many are watching is at $1,312, which represents a 50% retracement of last month’s selloff.

Darin Newsom, DTN senior analyst, said that while he does see gold pushing higher in the near-term, from a technical perspective, prices are ultimately headed lower.

He added that he sees the metal in a classic three-wave downward correction. The second-wave started this past week as prices bounced off a two-month low Monday, he explained.

Although gold has enough momentum to test the 61.8% retracement level at $1,324 next week, he added that selling pressure there could ultimately push gold back to $1,215 in the third-wave correction.

The Final Say

Although markets will continue to focus on inflation data and their impact on monetary policy, a full docket of economic reports will create some volatility next week.

Markets will receive regional manufacturing data, and some housing sector data, with markets waiting to see what Fed Chair Janet Yellen has to say following the latest CPI data and recent minutes.

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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