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How Low Can Gold Go? Investors Keeping Eye On $1,200

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(Kitco News) -Although negative sentiment in the gold market is at historic highs, some analysts suggest that prices could continue to push lower and possibly below $1,200 an ounce in the near term as the market lacks a catalyst to reverse the current trend.

While gold is off its recent one-year low, the market is still preparing to end its fourth straight week in negative territory. Gold has closed lower seven out of the last eight weeks. December gold futures last traded at $1,224.40 an ounce, down 0.67% for the week.

“The rate at which gold is falling is slowing but the market is still in a classic downtrend,” said David Madden, market analyst at CMC Markets.

But it’s not all doom and gloom for the precious metals market. Silver has nearly stopped its seven-week downtrend as prices prepare to end the week with slight positive gains. September silver futures last traded at $15.49 an ounce, relatively unchanged on the week.

Turning back to gold, Madden added that in the current environment, he expects prices to continue a “slow burn” lower and said they could eventually push below $1,200 an ounce.

“I don’t think we are going to see a major sell-off in gold, but we could see prices eventually push to important support at $1,180,” he said.

Madden added that it is difficult to be bullish on gold in the near term as the U.S. dollar and equity markets continue to dominate investor interest.

Simona Gambarini, commodities economist at Capital Economics, agrees that there is enough support in the gold market to prevent a total collapse in prices, but she also doesn’t rule out a near-term drop below $1,200.

Earlier this week, Capital Economics revised its 2018 gold outlook and now looks for the yellow metal to end the year at $1,200 an ounce. Gambarini said that analysts revised their outlook because of sustained strength in the U.S. dollar.

“The U.S. dollar is unlikely to fall back because of growing trade tensions and further interest-rates hikes,” she said. “In this environment, we don’t think gold will see a sustainable recovery.”

Cracks Starting To Appear In the U.S. Economy

Ryan McKay, commodity strategist at TD Securities, said that while his firm doesn’t rule out a drop below $1,200 an ounce, he doesn’t see sustainable weakness in the yellow metal.

He added that it would take another jolt of U.S. dollar strength that pushes the dollar index above 95 points to push gold below critical support.

He said that investors should start to pay more attention to U.S. economic data that appears to be disappointing relative to expectations. On Friday, the government reported that the U.S. economy created 157,000 jobs in July, missing expectations for job growth of 191,000. Average hourly wages posted muted growth, increasing 2.7% for the year.

“We have seen a few data points that came in below expectations and a flattening yield curve shows a growing risk for the U.S. economy, and we think that will eventually boost gold prices,” he said.

Is It Dangerous To Be Short Gold At These Levels?

Many analysts have been optimistic on gold as the market could be on the cusp of a trend shift because it may be difficult for sentiment to get any more negative than it already is.

Commodity analysts at BMO Capital markets warned investors to not get too complacent with low gold prices.

“In our view, with speculative short positions at record highs implying trend projection, market participants run the risk of being caught on the wrong side of any reversal in price action with China-U.S. trade friction continuing to escalate,” the analysts said in a recent report. “The last time sentiment was as bearish among this community was end-2015 before positioning aggressively swung the other way.”

The bank said that growing concern regarding U.S. economic growth in the second half of the year and ongoing global trade tensions rising could be the catalysts needed to reverse gold’s fortunes.

“With confidence at multi-year highs, and gold price volatility near historic lows (and well below the VIX), this suggests to us that investors are reluctant to appreciate that China is now gearing up for a prolonged period of trade friction, and dismissing optionality around potential macroeconomic shocks,” the analysts said.

George Gero, managing director at RBC Wealth Management, said that not only are speculative short positions at historic highs, but traders have bought more than 1 million option puts.

“If a squeeze comes, the guys that sold those puts are going to have to cover those shorts,” he said. “The short positioning in the market is so much bigger than most people think. It’s too crowded a trade to be short.”

However, even with all this negative sentiment, most analysts note that the market is lacking a catalyst to spark a short-covering rally.

“In the past, when bearish speculative interest has risen above normal levels it has prompted a rally in the market, but obviously you need a trigger and it is difficult to find one for gold,” said Gambarini.

“If you are banking on a short squeeze to boost prices, then you are long and won’t admit that you are on the wrong side of the trade,” added Madden.

The Final Say

Next week will be extremely light for U.S. economic data. Markets will have to wait until the end of the week for major inflation numbers, with the U.S. Producer Price Index coming out Thursday following by the Consumer Price Index Friday.

With little economic data to chew on, analysts say that gold investors need to keep an eye on the U.S. dollar and equity markets.

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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