$1,300 Is A 'Trap Door' And Here’s How Gold Can Break Out Of It - Mitsubishi
The yellow metal’s drop below $1,300 an ounce has turned this year’s support level into a “something of a trap door,” Mitsubishi analyst Jonathan Butler told Kitco News in an interview on Tuesday.
“That $1,300 level was seen widely as a support level throughout this year,” Butler said. “And having gone below it, we struggle to see any upward momentum back towards $1,300, but we still have some reasonable support and in the short-term we might start to see gold edge higher if the dollar gets a little more subdued.”
The U.S. dollar index will need to drop to at least 92 or 90, where it was much of this year, from the current six-month high of around 94. “That would be a very clear bullish signal for gold,” Butler noted.
The chances of the precious metal getting stuck below the $1,300 once again are looking quite low at the moment as several key things are different this year, Butler pointed out.
“We’ve got very clear path on U.S. rate hikes — at least two or three more hikes this year — and this has been priced in already. In comparison, in 2017 it was very much a “will they/won’t they” scenario for much of the year in regards to the U.S. rate hikes,” Butler explained.
The other big supportive gold driver this year versus last year is the equity market, Butler added.
“All the way through 2017, the U.S. stock market was reaching a series of all-time highs and that culminated in the record high we saw in January of this year. But, despite a record earnings season, U.S. stocks have failed to get back to where they were back in January,” he said. “There is still an element that the stock market could rally, but it is going to take something quite extraordinary given that a lot of the good news is already priced in at the end of last year, particularly the U.S. tax cuts.”
When it comes to getting above $1,300 and back to $1,365 an ounce, inflation will play a key role in helping gold prices, Butler said.
“Investors are concerned with real rates that is the inflation adjusted yield,” he stated. “And as inflation continues to pick up and go beyond the Federal Reserve’s 2% target, gold will remain supported as an inflation hedge. It should also keep the cost of carry for gold fairly low.”
In the short-term, gold’s price action will be choppy, trading on either side of $1,300, according to Mitsubishi. But, for the year as a whole, Butler is projecting an average of around $1,355.
“We will probably get back into the range of $1,300-$1,365 in fairly short order. We look at the technical charts — we haven't really broken down below the uptrend that can be traced back to the middle of last year, so there is still some technical support coming in even though we’ve gone below the 200-day moving average and below $1,300 psychological level.”
In the second half of the year, the gold market will also have some tailwind in the form of physical demand in Asia, triggered by the wedding season and Chinese National Day.
“Those are are not things that necessarily lead to a strong rally by themselves, but they should lead to some decent support on the downside,” the analyst said.
Last week’s drop below $1,300 was a surprising one, Butler highlighted, noting that there was lots of optimism across the precious metals sector.
“It happened to be one of the biggest single-day moves of this year. The fact that it took out the 200-day moving average in fairly short order led to some stop-loss selling that probably exaggerated the move downwards,” he said.
Butler doesn’t rule out more geopolitical uncertainty in the near-term, especially with the U.S. midterm elections coming in November.
“The overall geopolitical tension is still there in terms of North Korea and the Middle East and that would seem to suggest that investors will be hopping onto gold to some extent in the weeks and months ahead in preparation for this extraordinarily volatile time, especially when we consider we have U.S. midterm elections in November, which could change the political landscape somewhat and it could weaken the dollar,” he said.