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Can Gold Hold $1,400 After G20 Meeting?

Kitco News

(Kitco News) -Gold has been on a while ride this month and now investors and traders are waiting to see if the precious metal can hold support above $1,400, as the market sees consistent selling pressure after hitting a six-year high at the start of the week.

Sentiment in the precious metals market has turned unabashedly bullish this past week as prices pushed to a six-year high; however, as the week comes to a close, sentiment has become more reserved as markets start to question their aggressive expectations for lower U.S. interest rates.

Although off its highs, gold is still seeing its best month in three years. For the week, gold prices are up almost 1%; August gold futures last traded at $1,415.60 an ounce. For the month, gold prices are up nearly 8%.

The precious metal started to see selling pressure late in the week and was unable to find consistent momentum after members of the U.S. central bank tried to manage expectations of aggressive monetary policy action as early as next month. At the start of the week, markets priced in a more than 40% chance of a 50 basis-point cut in July. Markets now see a less than 30% chance of aggressive action.

Expectations started to shift after Federal Reserve Chair, Jerome Powell, said that the U.S. central bank should not overreact to short-term sentiment. However, he also noted that the case for looser monetary policy continues to build.

For many analysts, the key to gold's momentum will come on Saturday, when President Donald Trump meets with China's President Xi Jinping during the Group of 20 meeting.

Adam Button, managing director of Forexlive.com, said that positive headlines on trade following the much-anticipated dinner could further reduce aggressive monetary policy expectations, which would weigh on gold in the near-term.

However, he added that it's difficult to be bearish on gold in an environment where interest rates and bond yields are ultimately moving lower.

"I think the breakout needs to be tested to bring conviction into the marketplace," Button said. "But no matter what happens, the Federal Reserve is still going to cut rates next month, just not by as much as markets are expecting," he said.

Looking long-term, Button said that any test of support between $1,350 and $1,375 is a substantial buying opportunity.

"In the long term, I struggle to see how gold goes down when rates will be permanently low," he said.

Gold Has Run Too Far Too Fast

The gold market is closing the book on an incredible month, but some analysts are warning investors that its current pace isn't sustainable.

Many analysts are looking for gold prices to at least test initial support around $1,380 an ounce, which represented critical support for the last six years.

Ross Strachan, senior commodity economist at Capital Economics, said that positive sentiment following the G20 meeting could be the excuse some traders need to take profits in gold.

He added that he could see gold prices fall back below $1,400 an ounce in the near-term as markets scale back their expectations for aggressively loose monetary policy action.

"We were expecting to see a significant move in gold throughout the year as markets price in lower interest rates, but this rally has moved a little too far too fast," he said.

Although prices could fall in the near-term, Strachan said that his firm still expects gold prices to end the year around $1,400. After the summer doldrums, he said he expects equities to struggle in an environment of slower growth, which will once again drive gold prices higher.

Commodity analysts at Bank of America Merrill Lynch also see risks to the gold price in the short term; even as it raises, they see the potential for prices to hit $1,500 an ounce by the end of the year.

"We continue to believe that the macroeconomic backdrop remains supportive. In particular, the Fed turning more dovish at the same time as global macroeconomic headwinds have intensified should push the yellow metal to $1,500/oz in the next twelve months," the analysts said. "However, we are somewhat concerned about the speed with which the market has re-assessed the likelihood of rate cuts by the U.S. central bank. Any delays in delivering easier monetary conditions, potentially exacerbated by a constructive G20 summit, could push gold prices lower near-term."

G20 Trade Talks Unlikely To De-escalate Trade Wars

Although there is some optimism that trade tensions between China and the U.S. will ease after this weekend, many economists don't expect the positive sentiment to last.

Economists at Nomura said that they could see the U.S. government adding new tariffs on Chinese goods in September, which could be good for gold prices.

"Consequently, we remain unconvinced that de-escalation after this week's meeting will result in a sustained risk rally, given the potential for a trade truce announcement that lacks concrete developments on the most contentious issues to be viewed with some skepticism by investors," the analysts said.

Carsten Fritsch, precious metals analyst at Commerzbank, also remains optimistic on gold in the near and long-term. He said that it's unlikely the trade dispute between the U.S. and China will be resolved this weekend.

He explained that trade tensions will continue to weigh on economic growth and will force the Federal Reserve to cut interest rates. Although the Federal Reserve won't cut interest rates by 50 basis points in July, he said that his firm expects to see three rate cuts during the next three quarters.

"The aggressive monetary policy action will drive 10-year bond yields to 1.25% and that will be a positive environment for gold," he said.

In a note Friday, Commerzbank increased their year-end forecast for gold and now sees prices pushing to $1,500 by the end of the year.

Economic Data Could Trump G20 Headlines

For many economists, U.S. economic data will be the key factor in gauging the pace of rate cuts for the rest of the year. Next week could set the tone for July's meeting, with the release of important manufacturing sentiment data and June's employment numbers.

"The June employment report will be the last employment report before the next Fed meeting and if that disappoints I think you will hear more calls for a 50 basis-point cut," said Button.

In the last report, the U.S. Labor Department said that only 75,000 jobs were created in May, which significantly surprised markets.

Economists are also watching the Institute Of Supply Management survey, which is expected to highlight further weaknesses in the manufacturing sector.

"We look for a new decline in the ISM index to 51.0, as we expect ongoing trade headwinds to have affected business sentiment in June," said economists at T.D. Securities. "A recent spate of soft growth in core durable goods orders and a weak Market PMI also boost the odds for a downside surprise, in our view."

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