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Gold Prices Consolidating But The Rally's Not Over - Saxo Bank

Kitco News

(Kitco News) - The gold market is seeing some much-needed consolidation, dropping from its recent 6-year highs, but one market analyst said that investors should not give up on the rally just yet.

Gold prices have been under pressure since late Tuesday, after Federal Reserve members tried to manage expectations ahead of July’s monetary policy meeting. Market expectations for a 50-basis point cut next month have dropped since the Federal Reserve Chair, Jerome Powell, warned that the central bank shouldn’t overreact to a short-term swing in sentiment. August gold futures last traded at $1,413.40 an ounce, down 0.37% on the day.

In a report Wednesday, Ole Hansen, head of commodity strategy at Saxo Bank, said that gold prices have room to fall further; however, he added that fundamentals continue to support the current rally.

“We maintain a bullish outlook for gold, but first support needs to be established on this the first major retracement since the rally began back in June when bonds surged and the market began pricing in successive US rate cuts,” he said.

Looking at the technical outlook, Hansen said that gold prices have to hold support above $1,380, which was significant resistance for the last four years. On the upside, he said that gold prices face initial resistance at $1,485 an ounce and $1,585 an ounce, both represent critical retracement levels from the 2011 highs.

Fundamentally, Hansen said that gold looks strong in an environment of falling global bond yields. He noted that this past week, the value of global negative-yielding debt jumped to a fresh record of $13 trillion.

“The combination of lower Fed rates and falling bond yields and with that the potential for a weaker dollar are the forces required to carry gold higher over the coming months,” he said.

Although the Federal Reserve is trying to manage expectations, Hansen said that Powell’s latest comments hadn’t done much to shift the overall picture: the market continues to expect aggressive monetary policy action.

The market strongly believes in its assumption that economic risks led by the ongoing trade war between the US and China will force the Federal Reserve to react stronger and faster that they are prepared to signal,” he said.

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