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Gold Market Could Consolidate Next Week And Digest Impact Of Dovish Fed – Analysts

Kitco News

(Kitco News) -Analysts were looking for a break above $1,300 in the near-term and they were not disappointed as prices pushed to an eight-month high after the Federal Reserve signaled that it would halt rate hikes for the foreseeable future.

April gold futures last traded at $1,322.30 an ounce, up more than 1% since last Friday. Last month gold rallied more than 3%, which followed a 4% rally in December. Although gold prices are holding to most of its gains for the week, the market is off its highs and some analysts warn that this could be the start of a modest consolidation period after a two months of higher prices.

Gold’s held on to its weekly gains even after the U.S. Labor Department said that 304,000 jobs were created in January. However, the precious metal was not able to fight against renewed momentum in the manufacturing sector. Gold fell to session lows after the Institute of Supply Management (ISM) said that its manufacturing index increased to a reading of 56.6%, up from December’s reading of 54.1%.

Fed Provides Strong Support For Gold But More Is Needed

Ole Hansen, head of commodity strategy at Saxo Bank said that a correction following strong gains in December and January would be healthy for the gold market. He added that he could see prices testing initial support around $1,320 an ounce as the market waits for a new spark to ignite gold’s next move its in current uptrend.

The gold market could even fall back and retest support at $1,300 an ounce and still be in a technical uptrend, Hansen said.

Ryan McKay, commodity strategist at TD Securities, said that the Federal Reserve’s dovish shift should help to support prices in the near-term, but also added that the market needs new information if prices are going to go higher.

“There are still reasons to hold gold, but the gold market needs to see all these risk concerns reflected in the data,” he said. “We need to see weak data push down equity markets and drive gold higher.”

Geopolitical Risks, Growing Debt Are Gold Positive

Phillip Streible said that growing geopolitical uncertainty will continue to support gold prices through 2019.

He added that although the government officially reopened Monday, there is still a lingering threat of another shutdown in less than three weeks.

“Gold right now has to switch its focus from exclusively watching the Fed to looking at all the geopolitical risks,” he said. “If there is another government shutdown, volatility will jump higher, pushing equities down and potentially drive gold higher.”

Colin Cieszynski, chief market strategist at SIA Wealth Management said that with the Federal Reserve decision now over, markets will start to focus on growing risks to the global economy.

“We can see that risks to the global economy are becoming elevated and are going to be hanging around for a while,” he said. “In this environment, I think that there is room for gold to push higher.  

One financial risk that is growing in importance is the continued rise in sovereign debt.

In a recent report, Mike McGlone, senior commodity strategist at Bloomberg Intelligence said that government debt looks unstoppable.

“Gold is set to resume the almost two-decade-long bull market on the back of the increasing U.S. budget deficit and peaking dollar,” he said.

Federal Reserve Chair Jerome Powell even comment on the path of U.S. government debt, saying: “In the long-term, the Federal budget is not on a sustainable path and needs to be addressed.”

Earlier this week, the Congressional Budget Office said that U.S. is expected to increase its debt by 12 trillion between 2020 and 2029. The increase in debt is the results of more spending and slower economic growth, the CBO said in its report.

Peter Grosskopf, CEO of Sprott Inc., said that although he doesn’t pay attention to gold’s daily price action, he said that he sees long-term potential for the yellow metal because of growing sovereign debt around the world.

“We think the Fed is in the box and can’t tighten anymore because of the record amount of debt,” he said. “If you are an investor and don’t have gold in your portfolio now is the time to get in. We are going to start to see some shock waves in financial markets because debt levels are unstainable.”

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