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Kitco News Weekly Outlook: Gold Ends Five-Week Winning Streak, What’s Next?

Kitco News

(Kitco News) - The U.S. dollar remains the key market gold investors need to watch in the near-term as further weakness will continue to support the yellow metal, according to analysts.

Although gold is preparing to end the week in negative territory -- ending a five-week winning streak -- analysts see strong technical momentum in the marketplace that will continue to support prices.

February gold futures last traded at $1,333.70 an ounce, relatively flat from last Friday. Despite the slight pullback, prices remain near their highest levels in four months.

Ole Hansen, head of commodity strategy at Saxo Bank, said that a shallow correction in gold from last week is a sign that there is positive underlying sentiment in the marketplace. He added that it is a sign that prices have room to move higher in the near term.

Looming Government Shutdown

Helping to boost gold ahead of the weekend is a weaker U.S. dollar, which has fallen back to a three-year low as markets see a growing risk of the U.S. government shutting down if Congress is unable to pass budget resolution legislation.

The U.S. Senate has until midnight before the government runs out of money and is forced to shutter nonessential departments and place government employees on furlough.

Christopher Vecchio, senior currency strategist at DailyFx, said that the U.S. dollar is bearing the brunt of ongoing political uncertainty in Washington, as markets ignore bullish factors like rising bond yields, strong economic growth and an ongoing equity bull market.

“Political risk is driving the U.S. dollar at this point in time,” he said. “Even if the government doesn’t shutdown, will we see a recovery in the U.S. dollar? Maybe, but, I don’t think it is a game changer in the long run. The dollar is sick right now.”

Vecchio added that systemic greenback weakness will continue to support gold prices.

“Gold is in a really good place right now,” he said. “I think buying gold on the dips as prices should be the prerogative for traders in the near-term. We are holding above $1,323 and I think it’s an easy shot through $1,345 to the September highs.”

Is Gold Due For A Pull Back

 However, some analysts have warned that because the gold market is at elevated levels, a final hour deal that sees the government pass a budget could create some profit taking into next week.

Colin Cieszynski, chief market strategist at the Fundamental Technician, said that he is neutral on gold in the near-term. He noted that the market is in a strong uptrend but technical signals point to slowing momentum in the near term.

Sean Lusk, director of commercial hedging with Walsh Trading, said that while gold market could consolidate lower next week, there is enough technical momentum to keep prices above key support levels.

He added that not only is gold benefiting from a weaker U.S. dollar but fund managers are also moving back into the yellow metal to establish defensive positions against a potential correction in equity markets and rising inflation concerns.

Yields Continue To Rise But So Does Gold

The breakdown in the negative correlation between gold prices and bond yields continues to surprise investors. Ten-year bond yields, at 2.63%, have risen to highest level in a year, but gold continues to hold near a four-month high.

Hansen said that the divergence in the correlation bodes well for gold as it is further evidence that there is underlying support for the yellow metal. He added that while bond yields are going up, inflation expectations are also rising, which means real yields remain relatively low, a positive factor for gold, which is seen as a non-yielding asset.

Levels To Watch

Cieszynski, said that he sees gold trading in a $20 range in the near-term and the next breakout will determine the direction of the next trade.

“If gold breaks support at $1,324 an ounce then you will see lower gold prices,” he said. “If the market breaks resistance at $1,344 an ounce, then the direction is higher.”

While, Vecchio sees critical initial support at $1,323 an ounce, he added that he wouldn’t be outright bearish on gold until prices broke below $1,305 an ounce. On the upside he said the key level to watch is the September high at $1,357.

The Final Say

The economic calendar will depend entirely on what happens in Washington. If there is a government shutdown, then traders get to sleep in, as the government will not release or collect economic data.

However, if a last-minute deal is made, then next week will be fairly busy with variety of economic reports. The key report will come out on Friday with the first reading of fourth quarter gross domestic product.

Outside of the U.S., traders will want to keep an eye on the Bank of Japan monetary policy meeting Monday and the European Central Bank meeting Thursday. Hawkish comments from these two central banks have boosted their respective currencies against the U.S. dollar, which in turn has helped the gold market.

Also global leaders will converge in Davos Switzerland for the annual World Economic Forum.

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.