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What's the catalyst to take gold price to $1,900?

Kitco News

(Kitco News) Now that gold is sitting comfortably above $1,700 an ounce, is it ready for liftoff towards $1,900? Analysts remain optimistic but say that the precious metal needs a new catalyst to get it there.

After an eventful week, gold managed to stay above $1,720 an ounce. The precious metal even attempted to break the key resistance level of $1,750 on Thursday. And even though the move up failed, June Comex gold futures were last trading at $1,733.90, up 0.38% on the day.

"Factors that would normally weigh on gold, such as rising stock markets and the firm U.S. dollar, do not appear to be pressuring its price all that much at present," said Commerzbank analyst Eugen Weinberg.

This trading pattern could be a sign that it's time to start picking up gold, RJO Futures senior commodities broker Daniel Pavilonis told Kitco News.

"Market sentiment is low compared to where it was back in August. This is a good sign. It is probably the time to start picking up gold. Next week, we could see more of an up week for gold," Pavilonis said.

Gold is being pulled by two different outlooks — the short-term risk-on view, which is based on vaccinations and the economic recovery, and the long-term risk-off view, which is filled with uncertainty and an accommodative Federal Reserve.

"I'm not surprised we are not breaking to the upside yet. The U.S. dollar continues to be firm. It will be firm for the next little while as Europe is shutting down after failures with vaccine distribution. Flows of funds are likely to skew to the U.S.," said TD Securities head of global strategy Bart Melek.

In the long-term, however, there is uncertainty, Melek pointed out. "We happen to think we break out into $1,900 by year-end because we will see inflation and no action from the Federal Reserve," he said. "Also, we'll have more debt and more infrastructure spending."

Potential catalysts

Yet, gold is unlikely to surge until there is a new catalyst, according to analysts.

"Gold appears comfortable at current price levels. Physical demand offers a cushion on the downside, but a macro catalyst to drive upside risk is absent," said Standard Chartered precious metals analyst Suki Cooper.

One such catalyst could be gold's break from 10-year Treasury yields. Recently, gold has been dragged down whenever yields would go up. But that inverse relationship could break, which would help gold breakout, Pavilonis said.

"Rates are going up a bit today, and gold is holding well. It is a positive sign. Maybe we start to snap free of the correlation that if rates go up, gold has to go down. If we can deviate away from that with the announcement of Biden's new infrastructure package, it will be good for gold," he said. "When we see inflation, it is time to buy gold."

With more money printing and more accommodative policies out there, inflation will kick in, and the February low could be the bottom in gold, Pavilonis noted. "The longer we see sideways price action in gold, the more the path of least resistance becomes to the upside," he said.

Another catalyst could be the U.S. dollar finally losing steam. "As the year unfolds, the USD resumes its downtrend, and real yields remain negative, prices are likely to regain traction," Cooper said.

Also, there are a number of risks that could flare up, affecting investors' risk appetite, said FXTM market analyst Han Tan.

"From signs that COVID-19 cases are making a resurgence globally to simmering U.S.-China tensions, amid the shifting expectations for the Fed's policy outlook, the relative calm in markets could yet be upended by the realization of such risks," Tan stated.

What to watch next week

The biggest data release is slated for Friday — the latest employment data. Market consensus is for the U.S. economy to have added 655,000 jobs in March. The U.S. ISM manufacturing PMI and jobless claims are scheduled for Thursday, while ADP employment data are going to be released on Wednesday.

Markets will also be watching the U.S. house price index on Tuesday and pending home sales on Wednesday. The U.S. markets will be closed for Good Friday.

Aside from macroeconomic data, investors will be keeping a close eye on the rhetoric from Washington, any new stimulus announcements, and the number of global COVID-19 cases.

"With the ink on the $1.9tn fiscal relief plan barely dry, next week sees President Joe Biden push ahead with the $3tn Build Back Better green energy and infrastructure plan," said ING economists. "The difficulty will be getting it passed by Congress, given the need for 60 Senators putting it forward for a vote … It may need to be broken up into smaller packages and diluted to some extent should Republicans put up stiff opposition. It is not going to be an easy sell."

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