U.S. Dollar, Equities Continue To Weigh On Gold - Saxo Bank
(Kitco News) - Although low interest rates and falling bond yields are supportive for gold prices, the yellow metal still needs more to attract renewed interest, according to one market analyst.
In a report Thursday, Ole Hansen, head of commodity strategy at Saxo Bank, said that the gold market needs to see weakness in the U.S. dollar and lower equity markets if prices are doing to push back to long-term resistance levels.
“While falling bond yields and an 80% probability of a U.S. rate cut before year-end is supportive, the other two engines, stocks and the dollar, have both been sputtering,” said Hansen. “Stable stocks reduce the demand for alternative or safe-haven assets, while the dollar has continued to recover from its post-FOMC sell-off.”
The Federal Open Market Committee surprised markets last week with a definitive dovish shift in monetary policy. Not only does the Federal Reserve not expect to raise interest rates this year, but the committee also lowered its growth forecast for 2019.
However, the U.S. dollar has remained resilient following the monetary policy decision.
The dollar index is currently trading near a two-week high at 97.26 points, up 0.31% on the day. Meanwhile, the S&P 500 is holding above the critical psychological level at 2,800.
According to Hansen, these two markets are weighing on gold prices, which have fallen below $1,300 an ounce. He added that gold’s March uptrend has been broken, which raises the risks of a broader sell-off.
“Using Fibonacci extension methods, the first level of support can be found at $1,300/oz followed by $1,291/oz and the important $1,283/oz level,” he said. “The depth of the correction is likely to be determined by the movements of the dollar and stocks.”
Although the U.S. central bank has turned dovish, many analysts have noted that the U.S. dollar remains the most attractive currency in the financial system. There is growing concern surrounding European economic growth, which is weighing on the dollar.
Most recently, the Reserve Bank of New Zealand was the latest global central bank to issues its warnings on global growth. The bank signaled that its next move is likely to be a cut in interest rates.
“Given the weaker global economic outlook and reduced momentum in domestic spending, the more likely direction of our next OCR move is down,” the bank said in its monetary policy decision Tuesday.
Although the Federal Reserve does not expect to raise interest rates this year, many Fed members have not signaled a desire to lower interest rates anytime soon.
Although Hansen sees the potential for lower gold prices in near term, in previous interviews with Kitco News, he has been optimistic on the yellow metal in the long term.
He has said that he remains long-term bullish on gold as long as prices hold above critical support at $1,275 an ounce.
In his report, Hansen said that the key for gold will be growth expectations. If the U.S. economy continues to weaken that will drag equities and the U.S. dollar lower, he said.