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Selloff to $1,600 or rally to $1,920? Next week could decide gold price's summer direction

Kitco News

(Kitco News) Gold is holding above $1,800 an ounce level, but analysts say that one key driver could either help gold rally to $1,920 an ounce or trigger another selloff to $1,600 next week.

That key driver is the U.S. dollar, RJO Futures senior commodities broker Daniel Pavilonis told Kitco News.

Gold was resilient this week, climbing close to $1,830 an ounce despite a firmer U.S. dollar, but the greenback's direction next week could be critical for gold, Pavilonis said.

A dollar retreat could invigorate the gold market and help it resume the rally to $1,920, while additional gains in the U.S. dollar could trigger a selloff to $1,600, he noted.

"It is trapped under the long-term trendline under DXY. The U.S. dollar is either going to break to the upside or rollback. A decline in the U.S. dollar would be good for gold and might be the point we need to get to $1,920," he said. "Selloff to $1,600 could also come into play."

On top of that, gold remains very sensitive to the bond market, which could start to see some movement due to the inflation narrative.

"Gold has to start closing above $1,840 to get emphasis to the upside. If the U.S. macro data continues to stay strong, interest rates will start to move, which has a reverse correlation to the precious metal markets. If that happens, gold could be under pressure," Pavilonis added.

Pavilonis is biased to the upside, however, expecting gold to move higher towards the end of July. "If we can close above $1,840, we got a fair shot back to $1,920."

On Friday, gold saw some profit-taking, which pushed prices down almost 1% on the day. The August Comex gold futures were last trading at $1,812.60, down 0.90% on the day.

After building support above the $1,800 an ounce level this week, gold is facing a strong resistance level at $1,830 an ounce, said Gainesville Coins precious metals expert Everett Millman. "The 200-day moving average is around $1,830. It appears to be strong resistance for gold right now. It also acts as a short-term top," Millman said.

Making things a bit more complicated are drivers pulling gold into different directions. "There are pretty balanced drivers on both sides. We do have inflation rising, but then we also have central banks around the world potentially tightening a bit. Those two dynamics have gold parked in place," Millman explained.

Aside from watching the direction of the dollar next week, oil also remains a major outside market driver. "Higher oil prices would mean an uptick in inflation, and that is positive for gold," Millman added.

Year-to-date, gold is down around 4%. But all the price consolidation and the supportive macroeconomic environment could mean that gold is ready to resume its rally, said Bloomberg Intelligence senior commodity strategist Mike McGlone.

It is the rising U.S. debt-to-GDP and continuous quantitative easing that will eventually help gold rise back towards $2,000 an ounce, McGlone noted on Friday.

"Down about 4% in 2021 to July 15, and having retraced almost 20% from record highs, the metal appears ripe to resume its rally. A potential catalyst for gold to breach $2,000-an-ounce resistance is a bit of reversion in the stock market and extended decline in U.S. Treasury bond yields from the March peak," he said. "We see gold more likely to approach $2,000 resistance than sustain below $1,700 support in 2H. Like bonds, the metal may provide a hedge vs. a rise in stock-market volatility."

Data to watch

Next week will not be as busy data-wise, but there will be several important releases to keep an eye on.

On Tuesday, markets will be monitoring the U.S. building permits and housing starts figures from June. Then, jobless claims and existing home sales are scheduled to be published on Thursday, followed by manufacturing PMI on Friday.

Another event to watch will be the European Central Bank monetary policy meeting on Thursday.

"The meeting should shed more light on whether the new strategy is just window-dressing and a formalization of the well-known monetary policy stance or actually a shift towards more dovishness and even more determined monetary policy easing to achieve what the ECB hasn't achieved for a decade: inflation back to target," said ING economists.

On the other hand, there will be no major Federal Reserve comments prior to the July 28 monetary policy meeting.

"We are now entering the Fed's 'quiet period' where senior officials avoid talking about the monetary policy outlook, while the data calendar is relatively thin, so we are not expecting major market moves to be driven from the U.S. macro news flow over the coming week," the ING economists added.

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