Make Kitco Your Homepage

Again, All Eyes On $1,300 Gold Next Week As U.S. Dollar Remains Resilient - Analysts

Kitco News

Editor's Note: Kitco News has the best precious metals coverage in the world and is in the process of improving its mining news, so we want to hear from you. If you work in the mining sector please take this short survey to help us bring you the news you want.

(Kitco News) - Once again $1,300 an ounce is back in focus as a stronger U.S. dollar and improving risk sentiment is expected to weigh on gold prices next week, according to some market analysts.

The gold market is starting a new month on the back foot as prices break below critical support falling to a five-weeks. The selling pressure comes a week after prices pushed to a 10-month high. April gold futures last traded at $1,300.30 an ounce, down 2.4% from the previous Friday. Meanwhile, the U.S. dollar last traded at 96.45, up 0.24% on the day.

According to some analysts, the gold market is trading at a critical support level.

“Gold has broken below an ascending trendline of support,” said Joshua Mahony, market analysts at IG in a research note Friday. “Should we see a break below the $1,303 mark, it would look like we are set for a period of weakness, with the market giving back some of the gains seen throughout the past four months.”

Gold’s weakness come following data that shows a modestly resilient economy; in particular, on Thursday, data showed that the U.S. economy was stronger than expected in the fourth quarter of 2018. U.S. However, other data released Friday showed slowing momentum in the manufacturing sector last month and declines in personal income in January.

Fawad Razaqzada, technical analyst at City Index said that the data have not been as weak or consistent as some economists were expecting, which is supporting renewed momentum in the U.S. dollar and is pushing bond yields lower as investors feel less of a need to hold safe-haven assets.

“Right now we are only seeing pockets of weakness, nothing consistent and that will impact rate expectations,” he said. “We really need to see consistent weaker data to really push rate hikes off the table this year and drive gold prices higher.”

Ole Hansen, head of commodity strategy at Saxo Bank agreed that it all comes down to interest rate expectations and right now the data is starting to challenge the dovish sentiment in the marketplace.

“Right now the market is least prepared for higher interest rates so any data that shows positive economic growth will cause a shift in sentiment and that will weigh on gold prices,” he said.

Hansen said that he could see continued weakness in gold in the short-term because of evolving investor sentiment. However, he added that gold still remains in a positive uptrend.

“I think in the short-term we could push through support at $1,300 and I think the level to watch will be $1,275 as this is a key support and retracement level of this rally,” he said.

Razaqzada said that while gold prices can move lower, he does feel this selloff is just a correction in the larger uptrend. He added that because of lingering global growth concerns, bond yields can’t remain at their current elevated levels. He added that it wouldn’t take much to spook investors back into bonds.

U.S. Dollar Remains A Key Threat To Gold

Not only is mixed U.S. economic data supporting a bid in the U.S. dollar and weigh on gold, Neil Mellor, senior currency strategist from the Bank of New York Mellon, said that brewing problems in the Eurozone will provide further support for the greenback.

Next week the European Central Bank (ECB) will hold its monetary policy meeting and investors will see just how growing global risks will weigh on the regional’s economic growth prospects.

“When there is a world of uncertainty in the marketplace, investors have few choices and that support the U.S. dollar,” he said. “The ECB faces a lot of problems and it’s not clear how they are going to face them, particularly has most of its ammunition has been spent.”

But it’s not just U.S. dollar strength that is currently hurting gold demand. Mellor said that weak inflation growth is also reducing the need for investors to hold the yellow metal.

“I think gold needs to weaken on a fundamental basis as the world enters a low growth phase. Because of lower growth and weak inflation there won’t be a big que at the gold counters,” he said. “There is just no inflation in the world. We have a structural low inflation problem.”

All Eyes On U.S. Employment Data

For many analysts and economists, the spotlight next week will be on February’s employment data, which will be released Friday. However, focus is shifting away from how many jobs are created to how fast wages are growing.

Although positive economic data could continue to support the U.S. dollar, Hansen said that he still sees limited potential as there are still growing risks to global growth, particularly from Europe and China.

“Global growth is like a super tanker; its momentum is slowing and you can’t just flip a switch to get it going again,” he said.

Along with employment data markets will pay close attention to the ISM service sector data, following Friday’s disappointing manufacturing numbers. Markets will also receive new home sales numbers. The housing sector has been a significant drag on the U.S. economy has many new home buyers have been priced out of the market because of rising home values and rising interest rates, which has pushed mortgage rates higher.

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.