Gold Wants To Grind Higher Despite The Latest Failed Breakout - Analysts
(Kitco News) - For those keeping score at home, the gold market has seen seven failed breakout attempts since its multi-year high reached in 2016.
While the lack of follow-through buying has been demoralizing for some gold investors, many analysts continue to point out that the gold prices are still in a solid uptrend, creating higher lows along the way.
“The market is struggling, but it looks like it wants to grind higher,” said Darin Newsome, senior technical analyst at DNT.
He added that geopolitical instability will continue to support gold as a safe-haven asset.
Although the gold market is well off its eight-week highs seen earlier in the week, it is still holding on to positive gains. June gold futures last traded at $1,347.80 an ounce, up almost 1% since the previous Friday.
“On balance I see limited reason for selling but at the same time, I am very disappointing that gold once again failed to break higher although it is edging closer,’ said Ole Hansen, head of commodity strategy at Saxo Bank.
The silver market is also showing signs of life as it shows gains for the second consecutive week. May silver futures last traded at $16.655 an ounce, up 1.6% since last week. The silver market garnered extra attention this past week after GFMS Thompson Reuters said -- in its World Silver Report for the Silver Institute -- silver supply fell for the second consecutive year, dropped 4.1% in 2017.
However, the analysts said that this drop in supply will have less impact on prices than investors might think.
“It’s also the fact that you have a lot of above-ground stocks… in terms of bars and coins that are available to feed the market,” said Johann Wiebe, lead metals analyst for GFMS Thomson Reuters in an interview with Kitco News. “So it doesn’t necessarily mean that a deficit will lead to higher prices.”
However, many commodity analysts remain optimistic that silver can still outperform prices if the market can break out of its well-established trading range.
Turning back to gold, in an email comment to Kitco News, Mike McGlone, analyst at Bloomberg Intelligence, said that it is only a matter of time before prices break higher, saying that the “market is as ripe as it gets.”
He added that growing stock market volatility and a weaker U.S. dollar will remain critical factors in gold’s uptrend.
Oil Market Can Support Higher Gold Prices
Oil prices, which are trading near a four-year high could help to push gold prices higher and the entire commodity complex.
In a report published Friday, analysts at Goldman Sachs reiterated their bullish call on commodities this year, driven by higher oil prices.
“With low cross-asset correlations, increasing inflationary risks, a positive carry and the potential for oil supply disruptions in the Middle East, the strategic case for owning commodities has rarely been stronger,” the Goldman analysts wrote in their report.
Within the commodity sector, the global investment bank is also particularly bullish on gold as it sees prices hitting $1,450 an ounce by the end of 2018
Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the annual In Gold We Trust report, said that higher gold prices will ultimately push inflation higher, which is supportive for gold prices.
McGlone said that he sees more potential in gold compared to oil. He noted that the gold/oil ratio, a measurement of the price of one ounce of gold versus a barrel of oil, is at its lowest level since 2015.
He added that as he expects the ratio to move back to its historical average, which would push prices above $1,400 an ounce and oil to $54 a barrel.
Equities Will Impact Gold Prices
Along with oil prices, some analysts have also reiterated that gold investors need to keep an eye on equity markets as there has been a steady negative correlation between the two.
Some gold analysts note that stocks overall look fragile as markets hug their 200-day moving averages. The S&P 500 is struggling to hold on to gains heading into the weekend despite a strong start to the earnings season as JPMorgan (NYSE: JPM), Citigroup (NYSE: C) and Wells Fargo (NYSE: NFC) all beat earnings expectations.
Some analysts have noted that geopolitical uncertainty will continue to support volatility in the marketplace, which will weigh on equities.
Despite the positive start to the earnings season, Jasper Lawler, head of research at the London Capital Group, said it’s only a matter of time before equities push lower.
“I think we are seeing a small correction in a bear market and once this consolidation period is over the downtrend will resume,” he said. “We are seeing consolidation in equities, the U.S. dollar, bonds and gold and I think once this period is over we will see a continuation of the overall trends. I think we will see a weaker U.S. dollar and stronger gold prices.”
Stoeferle is also expecting to see higher gold prices because of a weaker. U.S. dollar. He added that it is difficult to get excited about the U.S. economy and the greenback when government spending has become unhinged.
“This past week the Congressional Budget Office in Washington D.C. estimates that the budget deficit will surpass $1 trillion by 2020. And will reach $981 trillion in the 2019 fiscal year.
“If this is how the government spends when the economy is booming, it is hard to imagine what their response will be when the U.S. falls into a recession,” asked Stoeferle.
How to play gold; Buy The Miners?
Some analysts are recommending traders look at placing bullish straddle strategies in the gold market, as prices hold near the top end of its range.
And while there is no clear consensus, some analysts say that the best way to play gold is to buy miners.
"Miners are probably the best way to trade it because the leverage here is going to be tremendous," said Boris Schlossberg in an interview with CNBC. "Even if they hedge some of their production going forward, the new higher prices are going to create much better earnings for them going forward."
Frank Holmes, CEO of U.S. Global Investors, also said – in an interview with Kitco News – that he currently prefers gold equities versus the physical metal, even as he expects gold prices to push above $1,500 an ounce eventually.
Holmes also quantified his mining outlook, saying that investors need to hold mining companies that are showing value, increasing reserves, boosting production and keeps costs under control.
However, famed investor and Shark Tank star, Kevin O’Leary said in an interview with Kitco News, said that he prefers to hold physical gold than the miners.
“The value of the commodity is whatever it is every day. I don’t need to have a manager in the middle screwing up his capital cost allowance, not controlling his costs,” he said.
Lawler said that the critical level in gold remains $1,375.
“Once this level breaks there is no putting the genie back in the bottle,” he said.
The Final Say…
While gold investors will focus on important outside markets to determine the near-term potential for the yellow metal, they will also need to keep one eye on economic data.
At the start of the week, markets will receive regional manufacturing data, as well as retail sales numbers for March.
Markets will also receive housing construction data.
Mid-week, markets will also have to digest the Federal Reserve’s latest Beige Book report. However, the minutes of the March central bank monetary policy meeting show that Federal Reserve committee members are already optimistic about the U.S. economy.
In other central bank news, the Bank of Canada will hold its monetary policy meeting and markets are expecting interest rates to remain unchanged.