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Gold Testing Critical Support But Analysts Still See Potential Next Week

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(Kitco News) - Gold prices are seeing sharp selling pressure ahead of the weekend, weighted down by surging momentum in the U.S. dollar as monetary policy between the U.S. and Europe continue to diverge.

Gold futures are preparing to end the week with heavy losses with August gold last traded at critical support at $1,280.40 an ounce, down 1.71% from last week. The lost comes a day after gold prices rallied to a four-week high. This is gold’s worst week in a month as prices dropped more than 2% the week of May 14.

However, despite near-term softness in the yellow metal, some analysts are reluctant to be significantly bearish on the yellow metal as geopolitical uncertainty remain high in the face of a growing trade war between the U.S. and China.

“I think in the short term we can see gold prices lower, but I don’t think we will see a major selloff in gold,” said Jasper Lawler, head of research at London Capital Group. “Given all that has happened this past week, I think gold is holding up reasonably well. I think it could struggle to rally in this environment, but it’s not going significantly lower.”

Eugen Weinberg, head of commodity research at Commerzbank, is also optimistic on gold in the near term, especially as the Trump administration approved $50 billion in new tariffs on Chinese imports. It is expected that China will again retaliate with its own tariffs on U.S. imports, with agriculture products in the crosshairs.

“Everything right now is going against gold, but I don’t think you want to be short the metal in this environment,” he said. “I don’t see one major catalyst that will drive gold higher but there are a lot of little factors, and it won’t take much to shift the negative sentiment in the gold market.”

A Tale Of Two Central Banks

Earlier in the week, the gold market was able to hold its ground around the critical psychological level around $1,300 an ounce, despite hawkish sentiment from the Federal Reserve after it raised rates by 25 basis points.

Markets much anticipated the rate hike; however, the Federal Reserve also signaled that it forecasts two more rate hikes this year, one more than markets were expecting. The U.S. central bank also raised its forecasts for economic growth and saw a lower unemployment rate for the year.

In plain terms, Fed Chair Jerome Powell said: “The economy is doing very well.”

While gold prices jumped to a one-month high following the Federal Reserve’s monetary policy meeting, the gains have been short-lived as markets have been digesting dovish comments following the European Central Bank’s monetary policy meeting.

While Mario Draghi said that the ECB is ready to stop its bond-purchase program at the end of the year, he surprised markets by saying that the central bank won’t look at raising rates until at least the summer of 2019.

His statement was interpreted Friday by many economists as being dovish, which has sent the euro dramatically lower against the U.S. dollar. The euro is a significant component in the U.S. Dollar Index, which is trading at its highest level since November 2016.

“After the big breakdown in the EUR/USD exchange rate yesterday, the positively-correlating gold was always going to struggle to sustain its gain,” said Fawad Razaqzada, technical analyst at FOREX.com.

Gold Is Down But Not Out

David Madden, market analyst at CMC Markets, said that his bias for gold in the near-term is down as the market has been unable to hold gains above its 200-day moving average, which is around $1,308 an ounce.

However, he described the gold market as dull because ultimately he sees the market trapped in its well-established range. While the hawkish monetary policy is weighing on prices, global market financial uncertainty is providing some support.

“Gold is trapped between the Fed’s desires to raise interest rates but also by its focus on global trade and economic issues,” he said. “If the Fed becomes really concerned about trade issues that would be very supportive for gold.”

Weinberg said that there is enough uncertainty in financial markets to shift sentiment in gold to a more positive tone quickly. He added that rising inflation and growing concern over the global economy makes gold the best safe-haven asset.

“You definitely don’t want to hold equities in this market as volatility picks up,” he said. “You also don’t want to hold bonds as inflation rises either.”

Lawler said that gold will struggle until there is a definite shift in financial markets, which means a weaker U.S. dollar and weaker equity markets.

Key Levels to Watch

Although gold is down sharply ahead of the weekend, analysts have pointed out that the market is still stuck in a range. On the upside, analysts have said that prices need a sustained break above $1,308 an ounce to attract investors back to the marketplace.

On the downside, gold could attract more selling pressure if prices break below critical support at $1,280 an ounce.

“In the near-term Dollar strength worries us, a close above 95 in the September Dollar Index will likely put significant pressure on Gold and open the door the mid-1280’s,” said Bill Baruch, president of Blue Line Futures. “While the Dollar remains the clear winner this week, one could view this battle as the best of the weakest and for that reason, the groundwork has been laid for Gold in the longer-term.”

The Final Say

With all the central bank decision out of the way, the market will have little to digest next week. The two major reports to be released next week is housing construction data for May and regional manufacturing data from the Philadelphia Federal Reserve.

Markets will hear from Draghi and Powell as they both speak at a European central bank conference next week; however, after their press conferences this past week, economists are not expecting any major surprises.

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.

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