Gold setting up for major summer rally: Watch this level next week - analysts
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(Kitco News) After touching and then falling back below the $1,800 an ounce level, gold might be gearing up for another significant rally this summer and this is the critical level to watch next week, according to analysts.
Q2 wrapped up this week and gold saw its best quarterly performance in more than four years. The quarter ended on a turbulent note as the August Comex gold first reached its 8.5-year high on rising coronavirus cases in the U.S. and then fell back below $1,800 on risk-on sentiment led by vaccine-related headlines as well as positive U.S. data.
Investors were encouraged by a promising early trial of an experimental vaccine from Pfizer Inc. and BioNtech SE, which showed patients producing antibodies against the virus. The U.S. jobs report also beat expectations on Friday with the U.S. economy, adding another 4.8 million jobs and the unemployment rate dropping to 11.1%.
However, going forward, the data could begin to deteriorate, warned CIBC Capital Markets senior economist Andrew Grantham.
“It will be much slower, harder going from here. With Covid-19 case counts rising again in parts of the country, leading to the delaying/reversing of reopening plans, high-frequency employment data already show a stall in the prior improving trend towards the end of June. And with several industries unable to fully reopen until a vaccine/treatment is ready, progress will remain sluggish even if case counts start to ease again,” Grantham said on Friday.
The risk-on selling pressure in gold was a knee-jerk reaction that is likely to reverse itself as any price dips are continued to be viewed as buying opportunities by gold trader, said TD Securities commodity strategist Ryan McKay.
“Right now, the market is trading gold with a typical playbook where risk appetite is surging and a lot of the market is selling gold in response to that. Not a correct move at the moment since the risk appetite will be bullish for gold. We should see to start inflation breakevens move higher. Real interest rates will continue to move lower in response to inflation, which is extremely bullish for gold,” McKay told Kitco News. “Market participants should embrace risk-on behavior inasmuch as it is driven by improving growth/inflation prospects, which should support gold.”
Gold on track to $1,800 and higher
Gold prices are on track to sustainable climb above the $1,800 level, said Afshin Nabavi, senior vice president at precious metals trader MKS SA, highlighting a level traders should be closely watching.
“Every day we have bad news, whether it is COVID-related or not. Gold is looking at a possibility of approaching $1,800, especially if it can break above $1,790.”
Gold tested $1,800 in August Comex futures this week but was not able to hold that level because of the lack of breaking above $1,790 in spot prices, which brought in profit-taking and eventually stop-losses, said Nabavi.
Gold is back in its trading range with $1,755 acting as good support on the downside and $1,785 as good resistance, he added.
“A lot of the firms have financial year-end in June and yesterday was a brand new happy new year. A lot of people are bullish on precious metals … Everyone is looking for safe haven,” Nabavi said.
After seeing a very encouraging price action this week, Gainesville Coins precious metals expert Everett Millman sees a potential for a summer rally developing in July and August.
“Even though we pulled back at the end of the week on some pretty standard profit-taking behavior. Over the rest of the summer, gold’s price action sets us up to test above $1,800. Towards the end of the month and into August, we will see gold higher,” Millman said.
All about inflation
Inflation is the trigger to watch for gold as the precious metal’s trading regime is shifting from a safe-haven play to an inflation-hedge one, said McKay.
“We are starting to consolidate a bit in a higher range here. Likely make another attempt to break $1,800 level,” he said. “When we start to get more inflationary response, the Fed policy will remain very supportive and rates low for the foreseeable future.”
The Federal Reserve will be willing to let inflation run higher while keeping rates low, which will lead to gold breaking $1,800 an ounce. “That is coming. I wouldn’t expect any major sell-off and any price drops will be bought,” he noted.
Inflation is already looking at some stabilization, said RBC Wealth Management managing director George Gero, who is expecting gold to climb above $1,800 an ounce.
“Looking forward, steadying food prices, gasoline prices, political headlines, pandemic headlines, economic headlines, virus serum headlines …. [are] all inflationary, so gold [will rise] over $1,800,” Gero said on Friday.
Biggest risk to gold
News of the second COVID-19 wave remain top of mind for investors as the U.S. daily infections topped 50,000 on Wednesday for the first time, said McKay.
Any escalation in infections and potential secondary shutdowns would be negative for gold, he clarified.
“This is the largest risk for gold. Potential shutdowns would have a deflationary response. Gold doesn’t do well in that environment,” McKay said.
Data to watch
Next week will be a quiet one from the data-perspective. The week will kick-off with one of the most important releases to watch — the U.S. ISM non-manufacturing PMI from June.
“Potential upside in the data could surprise the gold market with another knee-jerk reaction, which will ultimately be a buying opportunity,” McKay pointed out.
On Friday, investors will also be eyeing the U.S. PPI number from June.