Sentiment in gold is turning bearish after prices test eight-month low
Wall Street analysts are decisively bearish on the precious metal in the near-term, and retail investors have seen their bullish sentiment drop to a multi-year low.
However, looking beyond the headline figures, while some analysts say that gold prices have room to move lower in the near-term as higher bond yields could force the Federal Reserve to step in and introduce yield curve control.
A capital on bond yields would be bearish for the U.S. dollar, which some analysts say looks overbought.
"Gold's drop has been longer and deeper than I anticipated, but we are close to the capitulation stage where selling begets selling and longer-term holders decide to give up or stand aside," said Adrian Day, president and CEO of Adrian Day Asset Management.
Day added that gold's selling pressure is overdone, but momentum doesn't always align with the fundamental outlook.
"The low is close, very close, but we may have another week or so of pain before gold turns around," he said.
This week 18 market professionals took part in the Wall Street survey. Thirteen analysts, or 71%, said they were bearish on gold next week; meanwhile, three analysts, or 17%, said they were bullish. Two analysts, or 11%, were neutral on the precious metal.
On the retail side, 1,292 respondents took part in an online Main Street poll. A total of 553 voters, or 43%, called for gold to rise. Another 512, or 40%, predicted gold would fall. The remaining 223 voters, or 17%, saw a sideways market.
Bullish sentiment in gold among retail investors hasn't been this low since early-May 2019, a month before the precious metal embarked on its bull market.
While gold has managed to bounce off its June lows, the market is still looking to end the week with heavy losses. April gold futures last traded at $1,782.70 an ounce, down more than 2% from last week.
According to most market analysts, the bond market remains the biggest threat to gold prices in the near-term. Although inflation pressures are rising, they are offset by growing expectations of a sharper-than-expected recovery in economic activity. This sentiment is pushing bond yields higher, which in turn is raising real interest rates.
Ole Hansen, head of commodity strategy at Saxo Bank, said that he is bearish on gold even if the market continues to see strong fundamental support.
"I would love to be bullish on gold," he said. "Investors need to accept more pain before the turnaround. We are absolutely convinced that inflation will surprise to the upside, and once that happens, real yields will stabilize."
Although yield curve control is a real possibility, Hansen added that he doesn't expect the Federal Reserve to act until rising yields start to impact and threaten the equity market.
David Madden, senior market strategist at CMC Markets, said that he expects gold prices to be weighed down further by bond yields. However, he also said that he remains optimistic in the near-term.
"Rising yields will start to bring attention to possible interest rate hikes, and no central bank around the world wants that just yet, so there is still potential for gold to rally," he said.
Madden said that investors should look to play gold in a range between $1,700 a $1,900 an ounce. He said that he does not expect prices to rally back to $2,000 as the global economy shows signs of improvement.
While there is potential for gold to remain a currency hedge, some analysts note that it is now competing more with digital currencies. Friday Bitcoin hit a significant milestone with its market cap pushing to $1 trillion.
"In addition to high investor confidence removing a key tailwind, I think that some of the demand for gold as an alternative to paper money is being diverted into Bitcoin and other cryptocurrencies, particularly with Bitcoin now above $50,000," said Colin Cieszynski, chief market strategist at SIA Wealth Management.
However, not all analysts are bearish on gold in the near-term. Some analysts see the recent selloff as being overdone, and the market could be due for a technical bounce.
"The selloff to $1,760 shook out more longs. I can see a test on the 1795-1810 area. A move above $1,820 would begin healing the technical tone," said Marc Chandler, managing director at Bannockburn Global Forex. "The idea in some circles that bitcoins are the modern-day gold may have sapped some demand for the yellow metal. I am a bit skeptical of the claim. At the very least, I would say more time is needed to make that judgment."