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Gold market on edge; will Iran retaliate against U.S.?

Kitco News

(Kitco News) - Gold traders will be watching next week to see whether U.S.-Iran tensions continue to escalate.

If so, that could help keep a bid under the gold market, or at the least stave off any large corrections lower after the recent run-up in prices, since the precious metal is often bought as a safe-haven play at times of geopolitical crises, observers suggested. Should tensions abate, however, there is potential for profit-taking. Traders will also tune into a heavy slate of U.S. economic data, including the monthly jobs report.

Market participants will want to “keep a keen eye on the [U.S.-Iran] headlines and see how this plays out,” said Ryan McKay, commodity strategist with TD Securities.

A late-week U.S. airstrike in Baghdad killed Qassem Soleimani, commander of Iran’s elite Quds Force. The U.S. administration said the strike was to disrupt an “imminent attack” that would have endangered U.S. citizens in the Middle East. Meanwhile, Iran has promised revenge against the “criminals” who killed the Iranian general. The incident came after pro-Iranian militia members attacked the U.S. embassy in Iraq after an earlier U.S. strike on the Kataib Hezbollah militia.

“The market next week is going to be focused on Iran’s response, if any,” said Peter Hug, global trading director of Kitco Metals. “That’s going to keep the market somewhat jittery….

“Iran has vowed harsh revenge. I don’t know what that means and I don’t know how quickly that will come, but they tend to be consistent when they make statements like that – [meaning that] something is likely to happen.”

Against this backdrop, Hug said he would not anticipate a significant sell-off, unless “everything dies down” and there are no further worrisome headlines.

McKay pointed out that the “the fears of war in Iran” caused equities to tumble on Friday, sending gold higher. As of 12:05  p.m. EST, the Dow Jones Industrial Average was down 165  points, while spot gold was nearly $20 higher to $ 1,548.50  an ounce.

“Any retaliation, and how that plays out, will be on the top of the mind for the gold market,” McKay said.

Otherwise, Hug said, he suspects the gold market may be “overextended” after a recent run-up. If the U.S.-Iranian situation had not materialized, gold might have run into selling in the form of profit-taking.

“The primary thing I’d be concerned about is an escalation with Iran,” Hug said. “I think that’s going to keep the market bid. I just can’t see people selling this market short and getting out of this market until that issue with Iran is solved.”

Technically, the $1,555 area will be pivotal for gold, Hug said.

“If we can break through that, there are going to be a lot of people jumping on the market from a technical perspective,” Hug said. “It could run considerably higher and test possibly $1,600.”

Should that happen, he continued, U.S.-Iran tensions would be the most likely the catalyst. Otherwise, Hug said, he does not see the U.S. dollar coming under “severe pressure,” which tends to support gold.

Meanwhile, McKay noted that there is a heavy slate of U.S. economic data next week. Perhaps the biggest report will be the monthly data on U.S. nonfarm payrolls, due out Friday. A consensus forecast compiled by Bloomberg looks for hiring to slow to 160,000 new jobs from 266,000 in November.

Other major reports will include factory orders and the Institute for Supply Management’s non-manufacturing index on Tuesday, the ADP private-sector jobs report on Wednesday, then weekly jobless claims on Thursday.

Should economic data be weaker, gold likely will remain underpinned, McKay said. This further reduces the chances of any Federal Reserve rate hikes and could even mean potential for a cut, and gold tends to fare well in a low-rate environment.

“But I don’t think you’ll get any major sell-off on stronger data, mainly because the Fed seems willing to let growth run hotter and inflation run hotter, rather than stepping in to increase rates under that scenario,” McKay said.

The strategist commented that next week will be the first regular week of trading in the new year, with volume likely picking up since many market participants are still away from their trading stations during the holiday season.

The U.S. impeachment saga is a “non-story” for the gold market, Hug said. Even if the U.S. House of Representatives sends the articles of impeachment against President Donald Trump to the Senate, the Republican majority in the Senate have made it clear that they oppose impeachment.

“I don’t think the impeachment issue is going to be significant [for] the gold market,” Hug said.

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