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What's next for gold prices after U.S.- China deal and some Brexit clarity?

Kitco News

What’s next for gold prices after U.S.-China deal and some Brexit clarity?

(Kitco News) With the U.S.-China phase one trade deal, December’s Federal Reserve meeting, and the U.K. elections out of the way, what’s next for gold prices as the sector enters its seasonally favorable time of the year?

The biggest news this week was the U.S. and China reaching an agreement on a phase one trade deal.

Even though all the details are still a little fuzzy, the deal was confirmed and stops further tariffs from being rolled out. The next steps are legal reviews, authentication and signing.

The deal consists of some tariff relief, increased agricultural purchases, and some structural changes to intellectual property and technology issues, according to the announcements made by the U.S. and China on Friday.

U.S. President Donald Trump took to Twitter, saying that the next round of tariffs against China, scheduled to be rolled out on Dec. 15, will be canceled. Trump added that the 25% tariffs on $250 billion of Chinese imports will remain, while other existing duties will be cut to 7.5%.

In response, China will consider cancelling its additional tariffs against the U.S. scheduled for Dec. 15, according to China’s Vice Finance Minister Liao Min.

On top of that, Trump said that negotiations on a phase two trade deal will begin “immediately, rather than waiting until after the 2020 Election.”

Analysts saw the phase one deal as a temporary measure to stop additional tariffs from coming into effect.

"As details start to come out, it does not seem like the phase one deal really rolls back tariffs. Ultimately, it’s a bubble-wrapped way to delay the Dec. 15 tariffs. There are some minor agreements like the agricultural purchases. But, what seemed to have been agreed upon was just enough to delay the Dec. 15 tariffs. Nothing of the sort that was lauded to be a phase one trade deal,” Blue Line Futures President Bill Baruch told Kitco News on Friday.

The phase two trade deal comment from Trump is also a sign that the U.S. administration will continue to use trade talks as “a carrot” when the stock market sells off.

“And any time there are worries, they will dangle this carrot of a phase two trade deal now because the idea of a phase one trade deal worked so well,” Baruch added.

Fed’s long-term view supports gold

Another major piece of news that will help gold into the year-end is the Federal Reserve keeping rates unchanged and still sounding dovish enough, which will prevent gold from selling off too much.

“The Fed was supportive for gold. They were in line with a dovish narrative to be patient. U.S. and China haven’t solved anything, so lingering uncertainty will be out there, which favors the dovish narrative from the Fed,” Baruch noted.

Gold is holding up fairly well due to the fact that the Fed made it clear that it is unwilling to hike rates in the near future.

“Investors aren’t willing to sell gold too far because of asymmetry in the Fed’s reaction function, meaning that if growth worsens, they are certainly willing to cut, but if growth and data continue to be okay, it seems like hikes are off the table. This means that real rates will continue to move lower and it will continue to be a good environment for gold regardless,” said TD Securities commodity strategist Ryan McKay.

The repo market is something to keep an eye on going forward, said RJO Futures senior market strategist Phillip Streible.

“The repo market is something to keep an eye on. The Fed is really stepping up to the plate with regards to the repo market and it seems like the liquidity crisis is getting a little bit bigger than what we’ve been seeing.”

Brexit is coming…

Markets will also still be digesting U.K. Prime Minister Boris Johnson’s smashing election victory next week. Johnson’s Conservative Party received 364 seats to the Labour Party’s 203, winning the biggest majority for the Conservatives since Margaret Thatcher in 1987.

“We will get Brexit done on time by the 31st of January, no ifs, no buts, no maybes,” Johnson said on Friday.

Gold’s seasonally favorable time of the year

The yellow metal’s seasonably favorable time of the year begins in a week — Dec. 23, according to analysts, who are anticipating a year-end rally similar to last year.

“Gold has done very well in forming a bottom. We continue to battle $1,460. This is construction. This cannot go unnoticed. This is strong technical support down here as we are rolling into seasonally bullish time of year, which starts about a week from now,” Baruch said. “Overall, the technicals are supportive. There is a lot of uncertainty still out there. I think gold should trade higher. But, there needs to be more of an immediate-term catalyst.”

Next week will be the last full week of the year, which means still “decent volume” and “decent participants,” noted Streible.

As the holiday season begins, volume will be lighter, which could cause additional movements in the gold price, warned McKay. “A lot of people will be out of the market as holidays start. Lighter volumes could cause some action,” he said.

A lot still depends on the data next week, with key releases being U.S. gross domestic product and personal consumption expenditures out on Friday. This could make for a volatile session, warned McKay.

Gold’s moves will depend on the quality of the data, added Baruch. “One of the bigger catalysts is the data more broadly. Is it soft or is it missing?”

Other datasets to keep an eye on include New York Empire State manufacturing on Monday; building permits, housing starts and capacity utilization rate, and industrial production on Tuesday; and continuing jobless claims, Philly Fed manufacturing, and existing home sales on Thursday.

“A lot of data coming out next week. Jobless claims [were] a big miss this week. There is a lot of anticipation to see whether it was a one-time thing or a new trend,” said Streible.

McKay is watching the $1,485-an-ounce level on the upside and the $1,460 on the downside.

Streible added that he will feel more optimistic towards gold only when it closes above $1,491.60 an ounce — its recent five-week high.

At the time of writing, February Comex gold futures were trading at $1,480.50, up 0.56% on the day.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.