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Kitco News Weekly Outlook: How Gold Prices Got Their Groove Back - Hint, It's The U.S. Dollar

Kitco News

(Kitco News) - As the old trading saying goes: “The trend is your friend,” and some analysts think that gold will continue to trend higher on the back of a weaker U.S. dollar during the shortened trading week.

The gold market found new momentum last week as the U.S. dollar was unable to break above key resistance levels and eventually pushed to a new three-year low early Friday. According to analysts, this has been the most significant factor for gold, which is seeing its best weekly percentage gain in nearly a year.

April gold futures last traded at $1,355.80 an ounce, up 3% from last week is seeing its best percentage gain in two years.

Gold’s gains come as the U.S. dollar was down more than 2% at one point in the past week. The U.S. dollar has been unable to find any traction among investors and traders despite the fact that U.S. 10-year bond yields pushed to a four-year high.

“There has been a breakdown in yields support for the U.S. dollar and that is a signal that the market can go lower,” said Neil Mellor, senior currency strategist for BNY Mellon. “You have to like gold in this environment.”

Silver is also garnering a lot of attention; however, it is mostly negative as many investors are wondering why silver is not outperforming gold. Silver has lagged behind the yellow metal as the gold/silver ratio holds near a multi-year high above 80 points. The historical average for the ratio is around 60 points.

March silver futures last traded at $16.735 an ounce, up more than 3% since last week. Silver is seeing its biggest percentage gain since late December. The market is struggling to break critical near-term resistance at $17 an ounce.

However, despite its lackluster performance compared to gold, many analysts are not giving up on the grey metal as they see value in the marketplace.

“There is plenty of upside potential for silver because of positive market fundamentals and not only will it catch up to gold but we expect it to outperform this year,” said Maxwell Gold, Director of Investment Strategy and Research at ETF Securities.

Gold added that silver should also benefit from a weaker U.S. dollar environment.

What Is Driving U.S. Dollar Weakness

Mellor said that they have seen bearish sentiment in the U.S. dollar pick up since the U.S. Congress passed historic tax cuts in late December. Mellor added that the threat of the U.S. deficit growing by $1.5 trillion over 10 years because of the tax cuts continues to weigh the currency market.

“For the U.S. dollar, the worry is where all this spending is going. And of course, there is now a rising threat of stagflation as inflation rises and the economy slows,” he said.

But not only is the greenback dealing with domestic issues, but it also has to compete in a global market that is showing definite signs of growth.

Jameel Ahmad, global head of currency strategy and market research at FXTM, said in an email comment to Kitco News that investors are focusing on ongoing growth in regions like Europe, which could lead to aggressive central bank monetary policy action.

“The distance in economic recovery between the United States and developed economies has been narrowing for some time, but it has now come to the attention of traders that it is only a matter of time before other major central banks prepare the financial markets for their own adjustments to increase interest rates,” he said in an email to Kitco News. “It is quite clear that the market remains negative on the dollar. As long as the market remains negative on the USD, gold can continue to advance higher.”

However, not all analysts see the potential for gold in the near-term. Colin Cieszynski, chief market strategist at SIA Wealth Management, said that the U.S. dollar’s weakness is a little overdone, as well as gold, is slightly overbought.

While Cieszynski is bearish on the dollar and bullish on gold in the near-term, he does think there is potential for the markets’ trend to reverse in the short-term.

“Technically, we are getting to the top of the range in gold, and the market is running out of momentum,” he said.

Gold Can Fight 3% Yields

But it’s not just the U.S. dollar that gold investors are watching; commodity analysts also say they are keeping an eye on bond yields as the 10-year bond yield reached a four-year high this week. Traditionally, higher bond yields are negative for gold because it increases the precious metal’s opportunity costs.

While a weaker U.S. dollar has helped gold withstand higher bond yields, Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the annual In Gold We Trust report, said that rising inflation expectations are also playing an important role.

He noted that although interest rates are up, inflation expectations are also increasing, which means real yields remain low and could even push into negative territory. He added that with rising stagflation fears, the Federal Reserve could be reluctant to increase interest rates more than three times this year, which could put the central bank behind the inflation curve.

“We are very late in the growth cycle and I think there is a concern that rate hikes will be over sooner than people think. This will continue to weigh on the U.S. dollar and keep bond yields low,” he said. “I think we have just seen the start of the gold bull market and there is still plenty of value in the market.”

Gold To Attract Safe-Haven Demand

Along with real low rates supporting gold, Stoeferle said that he expects further uncertainty in equity markets to drive gold’s safe-haven demand higher.

While equity markets have recovered from its recent flash crash – the Dow Jones Industrial Average is seeing its best percentage gains since November 2016 – Stoeferle said that the market is not out of the woods yet as volatility is here to stay.

“This was only the first warning shot for equity markets and that will continue to support gold,” he said.

Levels to watch

According to analysts, gold has serious bullish technical momentum as it broke a near-term head and shoulders pattern as prices pushed above $1,354 an ounce. However, the market is forming double top with January’s 1.5-year high. According to some analysts, the market needs to see a close above $1,362 an ounce to attracting more buyers.

The next significant target level would be the 2016 high at $1,376.

On the downside, Ahmad said that as long as gold prices remain above $1,300 an ounce, the market is in an uptrend.

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.