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Gold Investors Need To Keep An Eye On Oil Prices Next Week

Kitco News

(Kitco News) - Gold has given up its October gains and analysts say that it will be difficult for the yellow metal to rally as oil prices fall into bear-market territory, according to some commodity analysts.

We’re only in the first week, but November is proving to be a disappointing month for gold as the yellow metal trades near a four-week low. December gold futures last traded at $1,208.60 an ounce, down 2% from the previous week. However, as disappointing as gold has been for some investors, the oil market has been devastating.

West Texas Intermediate crude oil has dropped nearly 22% in the last five weeks, falling from a four-year high in early October into a bear market. The oil market is seeing its longest losing streak in history.

Ole Hansen, head of commodity strategy at Saxo Bank said that he is not surprised gold has struggled as the drop in oil has created extreme pessimism throughout the commodity complex. He added that lower oil prices will impact commodity index funds, which in turn will influence gold prices.

“Oil is arguably the leader of the raw commodity sector. As goes crude, so go the other commodity markets,” said Jim Wyckoff, senior technical analyst at Kitco.com.

Although the gold market is not in great shape, Hansen said that he is not ready to be bearish on gold. He said that he is neutral on gold in the near-term.

“I can’t be outright bearish on gold because I don’t think the oil price weakness is sustainable,” he said. “I also think that equities also remain weak and that will support gold prices.”

Rising Interest Rates, Higher U.S. Dollar Also Weighing On Gold

Not only is gold getting hit from widespread negative sentiment in the commodity space, but it is also being dragged lower on expectations that the Federal Reserve will continue to raise interest rates, which is supporting the U.S. dollar near a one-year high.

Following Thursday’s monetary policy meeting, the Federal Reserve, while keeping interest unchanged in a range between 2.00% and 2.25%, reiterated its optimistic view on the economy, saying that activity has been rising at a strong rate.

“The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.” the central bank said in its statement.

David Madden, market analyst at CMC markets said Thursday’s monetary policy statement is probably having more of an impact on gold than the decline in oil prices.

“It’s not a coincidence that gold is down sharply the day after the Federal Reserve said it will continue to raise interest rates,” said David Madden, market analyst at CMC Markets. “If the U.S. dollar break’s its 2018 highs then that will kick gold back into a downtrend.”

Christopher Vecchio, senior currency strategist at DailyFx.com, said that he also sees further weakness in the gold market because of a stronger U.S. dollar.

“It’s going to be a tough environment for gold because interest rates are going up, real interest rates are going up and that is supporting the U.S. dollar,” he said. “I think we are going to see lower gold prices so I am staying away from the market for now.”

Colin Cieszynski, chief market strategist, SIA Wealth Management, said that not only is oil prices creating negative sentiment in the marketplace, but lower prices are deflationary, just not enough to force the Federal Reserve off its path of higher interest rates. Rising real interest rates because of low energy prices will be a significant negative for gold going forward.

Cieszynski said that he could see prices falling to $1,180 in the near-term as interest rate expectations weigh on the market.

“The stars just aren’t lining up for gold right now as energy prices fall and the Fed continues to raise interest rates,” he said.

Gold Doesn’t Have To Fear Higher Interest Rates

Although gold has a steep road to travel in the near-term, Vecchio said that there is still underlying strength in the marketplace.

“The U.S. dollar is near its highs, bond yields are near their recent highs, but gold is nowhere near its lows,” he said. “Gold’s relative strength is a function of more volatility in FX markets and equity markets. Gold is holding up relatively well.”

Axel Merk, in a recent interview with Kitco News, said that although the U.S. economy is healthy, investors shouldn’t completely dismiss gold as a defensive asset. He added that higher interest rates will lead to higher market volatility.

“Is now the time to be 100% in cash or gold? Probably not, but the time you want to diversify is when things look good. When things turn bad it is a little too late,” he said. “You have to find the strategy that works for you. You don’t want to hope that things are going to work out.”

Although most analysts say that weak oil prices will weigh on markets, Madden said that he does see a scenario where the yellow metal could benefit. If weaker crude threatens global growth expectations then investors could move into gold as a safe-haven asset, he added.

Levels To Watch

According to some analysts, gold’s more than 1% selloff Friday set the state for the market to test the psychologically important level at $1,200; however, most analysts are watching $1,190 a critical support.

“If $1,192 doesn’t hold as support then we have to accept that we will see a new low in the market,” said Hansen.

Cieszynski said that he could see gold prices fall to $1,180 an ounce before investors step back into the marketplace.

The Final Say

It is a relatively slow week for U.S. economic data and investors are expected to continue to digest the Federal Reserve’s latest monetary policy decision.

The week starts off slow but picks up some momentum with the release of October’s Consumer Price Index; Thursday will see October retail sales data along with regional manufacturing sentiment surveys.

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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