Gold Has Room To Move Higher But Don't Expect A Breakout Rally - Analysts
(Kitco News) - The gold market has room to move higher in the near-term with analysts expecting prices to push back above $1,300 an ounce as markets digest disappointing economic news around the world.
The gold market has crawled back from a 6-week low following what some economists have described as a massive miss in the U.S. labor market, with the U.S. economy creating only 20,000 jobs in February. April gold futures last traded at $1,299.90 an ounce, up nearly unchanged from last week.
The U.S. employment numbers cap a week of disappointing data across the globe, which some analysts have said will continue to support gold. Looking around the world, China reported weaker-than-expected trade data and Germany reported disappointing manufacturing data.
Thursday, the European Central Bank significantly downgraded its growth forecasts for the year, seeing Europe’s economy growing 1.1% this year, compared to expectations of 1.7% growth in December.
“It’s what you would expect in the late stages of a business cycle,” said Maxwell Gold, director of investment strategy at Aberdeen Standard Investments. “I expect that we will continue to see counter-cyclical demand for gold to pick up.”
Bill Baruch, president of Blue Line Futures, said he remains optimistic on gold as he expects global economic data to continue to disappoint. He added that the latest dovish action from the ECB could be the start of a growing trend among central banks.
“The ECB went full dove and so I think a lot of people are now asking themselves ‘What do these central bankers see in the economy that we can’t?’ That sentiment will be good for gold,” he said.
Currently, markets are not expecting any monetary policy action in March and see only a 1% chance of a rate cut. However, by year-end, market expectations have increased to a 20% chance of a rate cut, up significantly from a zero percent chance priced in a week ago.
Colin Cieszynski, chief market strategist at SIA Wealth Management, said that while he is optimistic on gold in the near-term, he thinks the Federal Reserve will remain patient and will not sound too dovish as January’s one-month government shutdown is still distorting some of the numbers.
“I think we still need to see more weak data to really push gold prices higher, but I think a peak in the U.S. dollar could push gold prices to $1,325 in the next few weeks,” he said. “To get above $1,350, you need to see the Federal Reserve turn dovish and I don’t think they are ready to take that step right now.”
U.S. Dollar Losing Its Mojo
The rally in gold comes as the U.S. dollar remains resilient, trading at its highest level since mid-December. Looking ahead, many analysts have said that strength in the greenback is less of a headwind for gold because of global central bank action.
George Milling-Stanley, head of gold investments at State Street Global Advisors, said that there is a “race to the bottom” among central banks as they try to stimulate their respective economies. He added that the U.S. dollar is strong, not because of any significant resilience in the domestic economy, but that it the best option out there.
“I am looking past all this short-term volatility. I see a general atmosphere of higher uncertainty, more equity market volatility and a weaker U.S. dollar, which will all be good for gold,” Milling-Stanley said.
Bart Melek, head of commodity strategy at TD Securities, described U.S. dollar strength as the “cleanest underwear in the dirty laundry.”
Although TDS is bullish on gold, Melek said that residual U.S. dollar strength will keep a cap on prices in the near-term. He added that he could see gold prices rising to $1,315 an ounce in the short-term.
He added that one risk to gold is inflation pressures. Melek explained that wage growth in the February employment report raises the chances that the Fed continues to look for a rate hike this year.
“I don’t think the Fed will raise rates this year, but higher inflation pressures raises the risk that they will have to do something,” he said. “Going forward, gold prices need a lot more negative data to push higher. Lousy inflation pressures will be better for gold.”
Jameel Ahmad, global head of currency strategy and market research at FXTM said that even if the U.S. dollar remains strong, gold remains an attractive alternative asset because slower global growth is too big of a risk to ignore.
“Gold is in an interesting position right now, because it is attractive to buyers at a time when global growth concerns are remaining rampant but at the same time left puzzled by a round of relentless dollar strength,” he said. “I personally think that gold will remain supported over the medium and longer-term, irrespective of how the Dollar might perform.”
How To Play Gold
Baruch said that gold’s rally after initially testing support could be a good entry point for gold investors. He added that investors should look to play the long-game by looking at purchasing a $1,325 June call options or a $1,325/$1,375 call spread option.
In the call spread, investors would want to buy $1,325 June call options and sell $1,375 June call options.
“Those are the two trades I would look at. There is some decent value in gold options,” he said. “You buy that and you have until May expiration. You can hold either of those positions as long as gold stays above $1,280.”