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Analysts Warning: Don’t Expect Much From Gold Next Week

Kitco News

(Kitco News) - Next week will be a test of endurance for gold bulls, as they wait to see if prices can hold above $1,400 an ounce in what is expected to be a relatively quiet week.

According to some analysts, an impending rate cut at the end of the month provides some support for the yellow metal in the next few weeks, but there are no significant factors on the horizon to change the fundamental backdrop in financial markets and provide new momentum to the precious metal.

"It's been a rollercoaster week for gold, so it's not surprising that we see some investors take some profits off the table," said Ole Hansen, head of commodity strategy at Saxo Bank.

The gold market is seeing decent gains for the week with prices holding above critical psychological support at $1,400 an ounce. Gold got a boost mid-week after Federal Reserve Chair Jerome Powell, in his semi-annual testimony before Congress, all but confirmed a rate cut on July 31. August gold futures last traded at $1,418.60 an ounce, up more than 1% since last Friday.

However, analysts said that gold's rally is now pricing in July's rate cut and the market needs some new information to make another leg higher in the near-term. Hansen added that investors shouldn't expect to see much action in the next few weeks as the summer trading season kicks in.

He added that because of low market activity, he expects near-term profit taking to weigh on gold.

"The reasons for holding gold haven't gone away, but I think we could start to see some nervous longs in the marketplace as the price struggles to make a new high," he said. "If I'm selling, it's not to sell short; but I'm selling to reduce my exposure to neutral."

Colin Cieszynski, chief market strategist at SIA Wealth Management, said that gold prices have seen substantial gains recently, so it's not surprising to see the market shift into a consolidation phase.

He added that the uptrend still remains in place even if the rally slows in the next few weeks.

It's All About The Fed… Yet Again

While Powell signaled that the U.S. central bank is ready to cut interest rates to support the U.S. economy, some market expectations are starting to shift as to whether the July cut will be a one-and-done move or the start of a new easing cycle.

In a recent interview, KC Chang, precious metal analyst at IHS Markit, said that he sees the July move as an "insurance cut," to provide a little bit more fuel for an already robust U.S. economy.

The CME FedWatch Tool shows that markets are pricing in a more than 75% chance of a 25 basis-point move and a 24.5% chance for a 50 basis-point move on July 31. Markets are still pricing in three rate hikes by the end of the year.

Bill Baruch, president of Blue Line Futures, said that bond yields are pushing higher as markets scale back Federal Reserve monetary policy action.

Cieszynski said that expectations for aggressive monetary policy action could depend on the second quarter earnings season, which starts next week with Citigroup, Goldman Sachs, Morgan Stanley, and JPMorgan all on the earnings docket.

He added that because of slowing global growth, he expects this earnings season to be disappointing.

The U.S. Is Strong, But It Can't Withstand A Global Slowdown

The U.S. economy remains relatively healthy, but Daniel Ghali, commodity strategist at TD Securities, said that the question on a lot of investors’ minds is if the U.S. can be an island in a sea of lower growth, a scenario he sees as unlikely.

Powell said global growth uncertainty is one of the major factors weighing on U.S. growth potential.

"Global growth is not just slowing, but it has contracted in some countries and that will eventually have a big impact on the U.S.," he said.

One nation that is drawing a lot of attention from market watching is Singapore; the nation's economy is highly reliant on trade and early Friday government data said its domestic economy shrank 3.4% on an annual basis, the worst quarter-on-quarter performance since 2012.

"We are comfortable with prices holding above $1,400 an ounce as markets wait for new updates from the Fed following the July meeting," said Ghali.

Debt Is Also A Growing Issue

Weaker global growth is expected to continue to weigh on investor sentiment, but analysts also warn that geopolitical uncertainty is also a factor to keep an eye on.

"With trade tensions dominating the discussion in recent months, concerns surrounding the need to raise the debt ceiling had taken a back seat. But that all changed this week, with a report suggesting the debt ceiling might need to be raised by early September, a month earlier than previously believed," said economists at Capital Economics. "It should be a relatively straightforward task for Congress to agree on a two-year spending deal that also raises the debt ceiling. But anything could happen amid the acrimony between Democrats and the president."

Friday, Treasury Secretary, Steven Mnuchin, warned that the U.S. government could run out of cash by September if Congress doesn't lift the debt ceiling before its August recess.

"We model various scenarios for cash projections. Based on updated projections, there is a scenario in which we run out of cash in early September, before Congress reconvenes," Mnuchin wrote in a letter to Speaker of the House, Nancy Pelosi.

During his testimony, Powell warned that the U.S. deficit is on an unsustainable path; however, he added that Congress needs to raise the debt ceiling in a timely manner so the nation can meet its obligations.

"To not raise the debt ceiling is unthinkable," he said. "The Fed can't shield the economy if the debt ceiling is not raised."

Record-High Equities Don't Pose a Risk For Gold

Some markets analysts have said that gold could struggle next week, as investors shift their focus to the record-breaking equity markets with the earnings season’s kick off.

However, Hansen said that investors ignore gold in the near-term, as both markets are rallying for the same reason: loose monetary policy.

The S&P 500 and the Dow Jones Industrial Average both hit record highs this week following the comments from Powell.

"I think you could see gold a bit lower as investors chase dividend-paying stocks, but they will also look to gold to protect their portfolios," said Hansen. "However, for gold to really shine, equities markets need to slow."

The Final Say

The release of next week's retail sales will garner significant focus from investors, as consumer spending has been a significant source of growth for the U.S. economy. Economists note that weaker than expected data could add to further calls for the U.S. Fed to aggressively cut interest rates.

"We estimate that retail sales were little changed in June, but that would still be consistent with real consumption growth rebounding to more than 3% annualized in the second quarter," said economists at Capital Economics.

Along with retail sales, markets will receive regional manufacturing sentiment data as well as housing construction numbers.

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