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It's Gold's Time To Shine With $1,300 In the Crosshairs - Analysts

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(Kitco News) - The dominos are starting to fall as major central banks warn of growing risks to the global economy and the Federal Reserve could be next in line that that has the potential to drive gold prices above $1,300 an ounce, according to some analysts.

After a short consolidation period, after holding important support levels, gold prices are ending the week on a strong note pushing back into striking distance of critical resistance at $1,300 an ounce, up more than 1% on the day. The gold market is seeing its best one-day rally since early-November; February gold futures last traded at $1,298.20 an ounce, up 1.17% since last Friday. This is gold’s best weekly performance since the last trading week of 2018.

“I think in the next few days, this could be where we see gold prices finally push through $1,300 an ounce,” said David Madden, senior market analyst at CMC Markets. “There is not much to hold gold back now as the Fed is expected to sit on its hands.”

Will The Fed Read From The Same Book As ECB and BOJ?

According to some analysts, gold’s late-week rally comes after both the Bank of Japan and the European Central Bank highlighted growing risks to their economies and global growth. Bank of Japan Governor Haruhiko Kuroda, earlier this week highlighted the ongoing trade dispute between the world’s two largest economies as a significant threat to global growth.

“To be honest, if U.S.-China trade tensions are drawn out, there will be a serious risk to the global economy – first to the two countries’ own economies,” Kuroda said during a news conference following the BOJ’s monetary policy meeting.

“The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility,” ECB President Mario Draghi said Thursday during his press conference.

Many analysts have said that the Federal Reserve could join the choir following its monetary policy meeting next Wednesday. Federal Reserve committee members have consistently struck a dovish tone after raising interest rates in December, its fourth rate hike in 2018. Next week’s meeting will be unique as a press conference will accompany the decision.

According to the CME FedWatch Tool, markets are not expecting any rate hike next week and see a 31% chance of one rate hike by the end of the year.

“Fed officials have sent a clear message that they intend to be ‘patient’ during Q1 with further rate hikes on hold until uncertainty dissipates as long as inflation remains stable,” said economists at Nomura. “We believe the statement will reflect this shift by emphasizing downside risks more clearly and acknowledging the recent moderation of economic growth in the first paragraph.”

Ronald-Peter Stoeferle, fund manager at Incrementum AG and author of the annual In Gold We Trust report, said that the “Great Monetary Policy U-Turn” actually started when China’s central bank loosened monetary policy by cutting its reserve requirements in October in an attempt to spur growth. China is also looking at launching a major economic stimulus program this year.

Stoeferle said that it was only a matter of time before central banks joined China to help spur global growth.

“The market is addicted to cheap liquidity and I don’t think that is going to change anytime soon. There is no way out for central banks caught in this zero-interest-rate trap,” he said. “Gold does very well in this environment.”

Fawad Razaqzada, technical analyst at City Index, said that he also sees gold prices pushing through $1,300 an ounce next week as the directional bias for the U.S. dollar is bearish in the near-term as the Federal Reserve joins other central banks in a dovish shift in monetary policy.

He added that in this environment he sees lower real interest rates, which makes gold an attractive non-yielding asset.

It’s More Than Just Central Banks

Some analysts have noted that a growing dovish tilt among central bankers is positive for gold, it is just one factor that will drive gold prices in the near-term.

Ole Hansen, head of commodity strategy at Saxo Bank said that the shift in tone from central bankers is just a reflection of ongoing worries about the global economy and continued geopolitical uncertainty.

He added that although equities have managed to bounce off their December lows, the fact that gold has held its ground at the same time is a sign of growing investor worries. He said that he expects to see continued safe-haven demand for the yellow metal, which eventually should help gold prices hold above $1,300 an ounce.

Hansen said that key events he is watching in the near-term are Wednesday’s trade talks between U.S. and Chinese officials as well as the ongoing political crisis in Venezuela as two presidents compete for power of the country.

“I don’t think investors should ignore the underlying demand for gold as a safe-haven asset,” he said. “Any major geopolitical upsets should push prices above $1,300 an ounce. If you look at what is happening in the world, the balance of risks tilts gold to the upside.”

U.S. Labor Market Holding Its Ground For Now

Along with Wednesday’s monetary policy meeting, investors will need to keep an eye on Friday’s nonfarm payrolls report. The labor market has been a major bright spot for the U.S. economy.

However, some analysts have said that investors need to keep an eye on wage growth as that will have the biggest impact on the Federal Reserve. In December’s employment report, wage grew 3.2% for the year.

“If we don’t see strong wage growth in January, it will give the Federal Reserve another excuse to be patient with its monetary policy,” said Hansen.

Razaqzada said that he doesn’t think the January employment report is going to have much impact on markets. Even if Friday’s employment report is stronger than expected, it won’t be enough to alleviate the growing risks to the global economy,” he said.

Political Turmoil Remains High In U.S.

Analysts also see a potential for gold amid ongoing political uncertainty in the U.S. partial government shutdown enters day 35.

Many political pundits have said that the shutdown has had a significant impact on 800,000 federal workers, who have missed their second paycheck. The turmoil has now spread to the general public. Friday, the Federal Aviation Administration shut down incoming flights at New York’s LaGuardia Airport on Friday. The shutdown was because the FAA didn’t have enough staff directing air traffic.

There are also reports of significant delays Newark Liberty International Airport and Philadelphia International Airport.

“I don’t think it’s surprising that we saw gold prices push close to $1,300 on a day with major airport delays,” said George Milling-Stanley, head of gold investments at State Street Global Advisors. “Ongoing political uncertainty will be helpful for gold."

Benjamin Tal, senior economist at CIBC World Markets, said that the shutdown is reaching a point where it will start to impact first-quarter growth, “and is certainly not adding to market sentiment.”

The travel distruption brought U.S. politicians to the table as President Donald Trump annouced late Friday that he would approve legislation to reopen the government for three weeks.

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