KITCO WEEKLY OUTLOOK: U.S. Dollar, Stocks To Dominate Gold Prices
(Kitco News) -With a relatively light economic docket next week, gold prices will remain at the mercy of the U.S. dollar and equity markets, which both look to move higher as investors see a path to major tax cuts and tax reform in America.
Gold prices are preparing to end the week in negative territory, down 1.7% from the previous Friday. The gold market has given up most of its gains from the previous week, which saw prices push above $1,300 an ounce. December gold futures last traded at $1,281.10 an ounce.
Silver is also down on the week, ending a two-week winning streak. December silver futures last traded at $17.255 an ounce, down 1% from last week.
The precious metals are suffering from growing positive investor sentiment in the marketplace. The U.S. dollar and equities saw renewed interest Friday after the U.S. Senate vote to approve a budget plan for the 2018 fiscal year. The legislation also contains a reconciliation clause that would allow Republicans to push tax reform legislation through the Senate with a simple majority, instead of the traditionally required 60% majority.
However, the tax debate is not over yet as the Senate bill has to reconcile with the House, which has said that any tax breaks must be debt neutral. The Senate legislation proposes to add $1.5 trillion to the Federal deficit over the next 10 years.
“Markets see a 75% chance of a tax cut next year and that is creating a tailwind for the U.S. dollar and that is going to be gold negative,” said Adam Button, currency strategist at Forexlive.com. “This U.S. dollar momentum is not going to disappear soon so it is difficult to be bullish on gold in the near-term.”
Fawad Razaqzada, technical analyst at Forex.com, said that he is also bearish on gold in the near-term because of higher equity market valuations and a stronger U.S. dollar. He added that he doesn’t see this trend ending anytime soon and is looking to sell gold on any rally.
“I think with gold below $1,300 you have to expect to see more weakness in the near-term,” he said.
Why Buy Gold When Equities Hit Record Highs?
Earlier this week, financial markets recognized the 30th anniversary of Black Monday, which is when the Dow Jones Industrial Average dropped more than 20% in a single day.
However, Button noted that if this correction happened today, prices would end up at pre-2016 election levels. He added that it is unlikely equities will see a major correction any time soon as investors are eager to jump into the marketplace.
“You see 12-point dips being bought because investors think that is as good an entry point they are ever going to get,” he said. “It is going to take a major geopolitical event to really spook markets and I don’t see anything like that on the horizon.”
Can The ECB Save Gold?
While all eyes are on the U.S. dollar, analysts warn that investors need to pay closer attention to the European Central Bank, which holds its monetary policy meeting next week.
The ECB is expected to present its plan to reign in its quantitative easing. Razaqzada said that there is still a lot of uncertainty surrounding the central bank’s plans and any hawkish rhetoric could send the euro higher against the U.S. dollar, which could boost gold prices.
“We think the euro has room to run a little bit higher against the U.S. dollar but I don’t know if it will be enough to boost gold prices,” he said.
Nick Exarhos, senior economist at CIBC World Markets, agreed that the euro could provide some headwinds for the U.S. dollar. However, he added that he is not expecting to see any major selloff, which could limit any short-term strength in gold.
“We see a natural limit to how high the U.S. dollar can go. The path for the Fed is still not very aggressive and that will limit the U.S. dollar but we also think gold will continue to glide lower because ultimately, interest rates are going higher,” he said.
Levels To Watch
For most analysts, gold’s key level on the upside remains $1,300 an ounce. Most analysts noted that the market needs to hold this level to attract new investment capital to create a long-term uptrend.
With prices below $1,300, Razaqzada said the first support level to watch in the near-term will be the previous week’s low around $1,277.
“If prices break below that level, it gives way to a minimum target to $1,233 and then I don’t see much support below that level and we could see gold push below $1,200 an ounce,” he said.
Button said that in the near-term, he thinks there is a greater chance gold will test $1,200 an ounce before it breaks last month highs above $1,350.
Bill Baruch, president of Blue Line Futures, is a little bit more optimistic on the metal as the price looks to fall in the near-term.
“There is tremendous value at 1263-1269 and this would present a strong buy opportunity as I do not see the dollar staying higher for longer,” he said.
The Final Say…
Although next week is relatively quiet, there are still a few reports investors should monitor. Markets will receive preliminary manufacturing data, and durable good numbers. The week ends with the release of the first look at third quarter U.S. economic growth.
The ECB will also be the main central bank event next week; however, the Bank of Canada will hold its monetary policy meeting and could create some limited volatility in the U.S. dollar.