Make Kitco Your Homepage

Watch $1,800 gold price level as markets focus on data misses - analysts

Kitco News

(Kitco News) This summer, the gold market is keeping investors on their toes, with the latest price action seeing the precious metal soar after briefly dropping below $1,700 an ounce level earlier in the week.

The swift $100-dollar moves are very volatile for the precious metal's space, which is seeing renewed interest amid some economic misses on the data front, analysts told Kitco News.

On Friday, gold jumped more than $25 as the University of Michigan's Consumer Sentiment Index disappointed, dropping to 70.2. 

This led to a selloff in the U.S. dollar and a move down in the U.S. Treasury yields, which is very positive for the yellow metal.

"We've got the U.S. dollar plunging here with the index dropping to 92.5 and a significant decline in the 10-year and 30-year Treasury yields," said TD Securities head of global strategy Bart Melek. "The market is a little worried about the economy and the spreading Delta variant."

It is now reasonable to assume that given the Federal Reserve's focus on the macroeconomic numbers, the expected tapering announcement might not be as strong as many people expect, Melek noted. "Right now, we are seeing some negative numbers, and the market is responding," he said.

The inflation data have also been positive for gold, showing that price pressures might have peaked. This means that the Fed might no longer be in such a rush to taper to tame inflation, said Gainesville Coins precious metals expert Everett Millman.

Great time to buy

Also, gold's price below $1,800 an ounce is an excellent entry-point for buyers, making the precious metal quite attractive on a technical basis, Millman pointed out.

"This is a very attractive entry price point after gold pulled back quite a bit. It is encouraging that we recovered quickly. Just within hours, gold was back above $1,700," said Millman. "I wouldn't be shocked if we broke above $1,800 next week. I'm more bullish now."

Another positive sign for gold is the physical demand picking in Asia, the precious metals expert added. "There are some pretty bullish signs on the demand side. We see gold jewelry and gold coin sales trending in the right direction in India. That should spur some more bargain-hunting demand," he said.

At the time of writing, December Comex gold futures were trading at 1,778.40, up 1.52% on the day.

TD Securities, which was right in its call to short gold just a couple of weeks ago, is now looking at $1,784 as the next resistance level. "We had a short position in gold and took profits at $1,707. My general view of gold now is that we will see more strength because rates will remain accommodative," said Melek.

Watch the debt ceiling headlines

One critical development to keep an eye on is the debt ceiling worries. This week, U.S. Treasury Secretary Janet Yellen once again called on Congress to raise or suspend the nation's debt ceiling on a "bipartisan basis." The statement comes as tensions between Democrats and Republicans escalate. 

"Debt ceiling issues will be interesting, but we still have some time. Yellen is pushing for progress on that. Historically, it could be tricky," said Melek.

In the past, when markets had become worried about this issue, it has been positive for gold. "Debt ceiling concerns are a potential trigger for gold, which does have this relationship to the national debt. Ever since 1971, when we went off the gold standard, price of gold risen in tandem with the national debt," said Millman.

Debt ceiling problems have always been resolved, but if the market starts to worry and debt becomes more of a problem in the headlines, gold's narrative naturally improves, he added. "Gold is a hedge against government being too loose with fiscal policies."

Data to watch

One of the more important macroeconomic releases to monitor next week will be retail sales on Tuesday, with market projections calling for a drop of 0.3% in July. If the number shows even a bigger drop, gold has a chance to see another rally, said Melek.

Also on the radar next week are the NY Empire State manufacturing index on Monday, industrial production on Tuesday, building permits and housing starts on Wednesday, as well as jobless claims and Philadelphia Fed manufacturing index on Thursday.

Another thing to watch is the Federal Reserve Chair Jerome Powell's virtual 'Teacher Town Hall Meeting,' scheduled for Tuesday, and the FOMC July meeting minutes, which will be released Wednesday.

"Even though most of the Fed members have been getting more hawkish, Powell has been stressing patience. And that is the more likely path. There are still threats to the economic growth, including the delta variant, which could block up shipping lanes," Millman said.

When it comes to digesting the FOMC meeting minutes, markets will be looking for any tapering comments.

"The July FOMC meeting minutes may discuss some aspects of the potential taper plans. The latest jobs and inflation figures have accelerated the debate, so the focus will be more on the composition of any taper rather than the timing," said ING chief international economic James Knightley. "We are now increasingly thinking we could get a September announcement on slowing monthly asset purchases from the current $120bn per month rate, with an October start date. We suspect it will be a much swifter taper than seen last time, with it possibly concluded by late 1Q 2022 or early 2Q."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.