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All signs are bullish, so why are gold prices in a rut?

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(Kitco News) - The strong rally in equities the last two months has taken some of the safe-haven demand away from gold, but bullish analysts have not given up on the metal yet, saying they look for “money printing” to eventually take gold higher.

Comex August gold, which has replaced June as the contract with the most volume and open positions, rallied strongly from a low of $1,454.80 an ounce on March 16 to a peak of $1,789 on April 14. Since, the contract has been largely sideways in a roughly $120 range that narrowed to a $85 range over the last three weeks. As of 10:22 a.m. EDT, August gold was $14.30 lower for the day to $1,713.90 an ounce.

Most analysts have remained bullish on gold. So why the rut?

“I think what’s holding gold back is the strong performance in the stock market,” said Phil Flynn, senior market analyst with at Price Futures Group.

Equities went into a free fall when lockdowns across the U.S. – and the world, for that matter – began in earnest in March as countries sought to slow the spread of the COVID-19 pandemic. Gold initially fell with stocks, which analysts at the time attributed to a need of many investors to sell assets generally to raise cash.

Gold subsequently rallied to seven-year highs as the Federal Reserve cut interest rates to zero, unleashed quantitative easing and other programs, and the government passed economic stimulus. Other countries undertook similar measures. But stocks also began to recover. The S&P 500 has now bounced by nearly 40% since its bottom.

Stocks initially rallied on hopes that the monetary accommodation and stimulus would underpin the economy. Now, they’re getting an added boost from the gradual reopening of economies.

“So even though the fundamentals of gold are still solid...people are finding more confidence and putting their money back in the stock market, and gold is struggling a bit,” Flynn said. “That’s why we’ve been in this sideways pattern.”

Or, as George Gero, managing director with RBC Wealth Management put it – gold has run into “double trouble” from “soaring stocks” and optimism about reopening of the economy.

Daniel Pavilonis, senior commodities broker with RJO Futures, said most market watchers probably did not expect equities to recover so quickly. For a while after equities bottomed, traders were selling into rallies. Now, he continued, they appear more willing to hang onto long positions in stocks.

Flynn added that some of the pressure on gold might have been long liquidation from futures traders who opted to exit from bullish positions in the June contract ahead of first-notice day at the end of the month, rather than roll them forward into the August futures. Further, he added, some traders might have been rolling out of gold and into stocks.

Still, observers said, strong stocks don’t mean that gold won’t shine again. Even as gold threatens to fall back below $1,700, Gero said he still sees $1,800-an-ounce metal.

“I still believe we will break out to the upside, even if the stock market continues to rise,” Flynn said. “We believe that gold, at some point, is going to respond to all of the stimulus and money printing.”

He later added, “We are getting to a pretty good buying area. The last time we were in this area and the market struggled, the market ran up and made new highs.”

Specifically, August made daily lows between $1,691 and the low $1,700s several times in early May before climbing to within $1.50 of the April 14 high, hitting $1,787.50 on May 18.

“It looks like we are doing a retest of that support area,” Flynn said. “If we hold it, I think there is a good possibility that we see some good buying come back into the market.”

Pavilonis commented that a move in the S&P 500 up through its 200-day moving average could mean there is a risk of gold falling to its 200-day average. For August gold, this average is around $1,582 an ounce.

“At that point, you want to back up the truck and buy it,” Pavilonis said, later describing himself as bullish on gold for the longer term. “With all of the money printing and everything, my view is we are going to see higher gold prices.”

Meanwhile, Pavilonis looks for equities to eventually pull back again. Right now, he said, many investors might be factoring in a return to normalcy as businesses reopen.

“But I don’t see that happening,” he said. “This might be a case where we [equity bulls] are jumping ahead and buying the rumor, and then we might sell the fact once we open up and everyone is walking around with a face mask, most people are too worried to travel still and don’t want to get onto an airplane...they don’t want to go to any outdoor activities, and schools are still a question mark.”

Many Americans may be willing to “ride it out” and stay indoors for a while yet, reluctant to open their wallets due to the ongoing uncertainty, he said.

“I think things are going to be changed for some time,” Pavilonis continued. “I don’t see people just jumping back into the way things were before. Restaurants are going to be different.….We really don’t know much about this. It’s just a lot of guess work.”

And, whenever stocks do pull back, gold prices can start moving “much higher,” Pavilonis said.

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