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Improving Risk Sentiment To Weigh On Gold Next Week – Analysts

Kitco News

(Kitco News) - Improving investor optimism is picking up as the U.S. and China appear to be moving closer to resolving their trade dispute, which could weigh on gold prices in the near-term, according to some analysts.

A four-day rally in equity markets is taking its toll on gold as the yellow metal looks to end a four-week winning streak. February gold futures last traded at $1,282.8 an ounce, down 0.5% since last week.

Investor sentiment in the precious metals market is not expected to change in next week’s shortened trading schedule. Markets are closed Monday in recognition of Martin Luther King Jr. Day.

Gold has struggled to find momentum into the weekend after news that China has offered to boost its U.S. imports over the next six years. The deal, valued at $1 trillion, would aim to reduce the U.S.’ trade deficit with China to zero, reports have said.

“The U.S. and China could be closer to a trade agreement than markets are thinking and that will provide some relief for investors,” said Chris Vecchio, senior market analyst at DailyFX.com. “In the near-term, we could see equities, the U.S. dollar, and bond yields push higher, which are all negative for gold in the near-term.”

Despite a bearish short-term outlook, Vecchio said that there is still potential for the yellow metal in the long-term, adding thathe will be watching critical support at $1,276.50 an ounce very carefully.

“If gold gets down there and we see some really strong buyers come in, then that would be a sign that the market is not ready to turn over and this weakness could be just a short-term correction on a bigger uptrend,” he said.

Vecchio said that gold still looks good as a safe-haven asset as there is a lot of uncertainty swirling throughout financial markets. Even if the U.S. makes a trade deal with China, it still faces the growing risk of slower economic growth, he pointed out.

Gold Is Still Doing What It’s Supposed To

Ole Hansen, head of commodity strategy at Saxo Bank said that he expects to see lower prices in the near-term but remains a long-term gold bull. He added that it’s still uncertain if the recovery in equity markets is just a bluff.

He noted that gold is holding its own in an environment of rising equity markets, growing momentum in the U.S. dollar, and rising equity markets. He highlighted that despite the selling pressure, gold is still within its monthly range.

“The world is still an uncertain place and we can see that there is still some strong underlying demand for safe assets,” he said. “The reasons for holding gold haven’t changed. But gold is doing what it’s supposed to as a hedge: it's taking a breather as other asset classes rally.”

Hansen said that in the near-term he could see prices fall to as low as $1,245 an ounce. He added that prices could still drop even lower and remain in an uptrend.

Bill Baruch, president of Blue Line Futures, said that he is also looking for gold to continue to weaken, saying that the market is seeing a “very healthy correction.”

He added that since the start of the new trading year, he has recommended investors take some profit in gold, as prices hit significant resistance around $1,300 an ounce.

“We have been telling our clients to capitalize on strength, so you don’t have to chase weakness,” he said.

Although Baruch expects to see lower prices in the near-term, he added that he remains a long-term bull. He said that he is looking to buy gold in a range between $1,282 and $1,262 an ounce.

For investors who want to limit their risks, Baruch said that April $1,300 call options are attractively priced. He added that options investors should pay close attention to the time decay of their contracts.

“I think we can get to $1,310 or $1,320 with the current economic environment that we have, but we really need to see signs of lower growth for gold to see a sustained push above $1,300 an ounce.”

U.S. Shutdown To Hit One-Month Mark

Next week, the partial government shutdown will hit the one-month mark and according to political pundits, there is no end in sight as nearly one million government workers are furloughed or work without pay.

Economists have noted that the longer the shutdown lasts the more significant the impact it will have on the economy.

“Our rough estimate is that if it lasts to the end of January, annualized GDP growth for Q1 would be about 0.5% weaker,” said Avery Shenfeld, senior economist at CIBC World Markets. “Should it extend to March end, disruptions would start to impact the movement of goods and people, key regulatory functions and so on, and growth could end up near zero, which is why such a lengthy shutdown seems unlikely.”

Because of the government shutdown, the U.S. economic data remains relatively light. However, there are still a few reports for investors to chew on, including existing home sales and preliminary manufacturing and service sector sentiment data.

Outside of the U.S., investors will be paying close attention to the Bank of Japan’s monetary policy meeting and the European Central Bank meeting. Markets will be sensitive to any comments regarding the health of the global economy.

Finally, politicians and corporate executives from around the world will head to Davos Switzerland next week for the annual World Economic Forum; except for the U.S., which pulled out its delegation from the international conference last week, citing the government shutdown.

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.