Don't Throw In The Towel Just Yet Even If USD Moves Higher - Analysts
(Kitco News) - U.S. dollar strength remains the most significant headwind for gold prices next week, but many analysts and investors are not ready to turn bearish on the yellow metal as there is still a lot of uncertainty within financial markets.
Gold is preparing to end its third consecutive week in negative territory, but the market remains entrenched in its trading channel, bouncing off a four-week low. Analysts also see gold hovering near its 200-day moving average at $1,313.90 as a sign of resiliency. June gold futures last traded at $1,314 an ounce, down 0.71% from the previous Friday.
The silver market is showing a little more strength compared to gold as the market has come a long way from its December lows seen earlier in the week, even as it ends its second week in negative territory. May silver futures last traded at $16.425 an ounce, down 0.11% from last week.
Gold's recent lackluster performance has been the result of surging momentum in the U.S. dollar, which has pushed prices to the highest levels for the year. Since its mid-April low the U.S. Dollar Index has rallied 4%, last trading at 92.80 points.
"Despite a stronger U.S. dollar, gold is still holding in its range, so I think there is some fundamental strength in gold. There is still a lot of uncertainty out there and I still see a need for a safe-haven in a portfolio," said Jasper Lawler, head of research at London Capital Group.
In comparison to gold, Lawler added that most major currencies, in particular the British pound and the euro, have all fallen below their 200-day moving averages.
U.S. Dollar Has Room To Move Higher
According to currency analysts, the U.S. dollar has two pillars of strength: technical momentum as the price pushes farther above its 200-day moving average and fundamental support.
Adam Button, head of currency strategy at Forexlive.com, thinks the U.S. dollar has room to move higher as it remains the best global investment.
"On balance, the market believes that the U.S. economy is strong than it looks compared to other countries and that will continue to be positive for the U.S. dollar," he said.
Ole Hansen, head of commodity strategy at Saxo Bank, explained that before the rally, the U.S. dollar saw unprecedented bearish positioning. He added that it is going to take some time before those short positions are unwound and the market finds some equilibrium again.
However, he added that even if the U.S. dollar does move higher, he remains bullish on gold prices. Hansen explained there are still long-term fundamental issues with the U.S. dollar, including growing government deficits.
"It's too early to look for a reversal in U.S. dollar strength, but at some point, this rally will run out of momentum," he said. "I think now is a good time to buy gold. I would need to see prices push below $1,280 before I turn neutral on gold," he said.
Rising Inflation, Equity Uncertainty and Geopolitical Tensions All Bullish For Gold
Although gold's performance has been disappointing lately, some analysts still see the potential for gold as a long-term play, especially after this past week's Federal Reserve monetary policy decision.
While the Federal Reserve left interest rates unchanged Wednesday, many analysts are focused on the Federal's Reserve's forecast that inflation will "run near the Committee's symmetric 2 percent objective over the medium term."
According to Axel Merk, chief investment officer and president of Merk Investments, this phrase means that the U.S. central bank will be comfortable with higher inflation pressure, without having to raise interest rates aggressively.
"The committee is emphasizing that it is okay if inflation rises above its 2% target," Merk said. "This is a strong indication that the Fed doesn't believe it has to get ahead of inflation. I think gold will do well in this environment."
Ultimately, higher inflation in a low-interest rate environment leads to real low rates, which is favorable for gold - a non-yielding asset.
Some analysts are also reluctant to sell gold as geopolitical tensions start to heat up particularly ahead of the May 12 deadline when President Trump has to decide whether or not to ratify the international nuclear agreement with Iran.
"It is really difficult to price in this risk. If the U.S. backs out of the deal then gold will shoot higher but if they ratify it then gold will drop," said Adam Button. "Iran is going to be the headline gold investors need to watch next week.
"Gold is going to continue to drift lower until there is another headline crisis," Button added.
Along with geopolitical uncertainty, Lawler said that gold could also start to attract capital from frustrated equity market investors.
"We are seeing lackluster equity market performance despite a stellar first-quarter earnings season. If you are looking for relative strength, I think you should look at gold."
Merk added that he also thinks gold will continue to be an attractive portfolio diversifier as equity markets continue to look expensive in an environment of higher volatility and rising interest rates.
The Final Say
Only two U.S. economic reports will be released next week, but they will be essential for gold investors. Markets will receive the Producer Price Index and Consumer Price Index numbers, Wednesday and Thursday, respectively.
Higher inflation pressures will be bullish for gold, which is traditionally seen as a hedge against inflation.
The week also have a variety of Fed speakers, including Fed Chair Jerome Powell, who will speak at an event in Zurich, Switzerland.