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This gold price level to spark even a bigger rally – analysts

Kitco News

(Kitco News) After a solid breakout above $1,850 an ounce, gold could be ready for even bigger gains. But first, the precious metal must breach this level, according to analysts.

Inflation accelerating to three-decade highs in the U.S. has pushed investors towards gold, with the precious metal up nearly 3% on the week and December Comex gold futures last trading at $1,865.90.

"It is all about inflation. The market is starting to embrace the fact that inflation will be longer-lasting. It will take years to fix the supply chain issues due to pandemic, all the stimulus, and tons of pent-up demand," RJO Futures senior market strategist Frank Cholly told Kitco News.

All eyes will be on the $1,835-$1,875 trading range for gold. A move below would indicate the end of the current rally, while a move above could trigger a move towards $2,000 an ounce.

"What's going to be critical to sustaining this breakout is that the market can hold $1,835. We want to be able to keep the prices above there," he said. "On the other hand, a close above $1,875 would spark a secondary rally to $1,900-25. I do think we may see $2,000 by the end of this year."

This is how technical buying works, Cholly explained. If the upper-trading range is taken out, people will start to feel the fear of missing out, which will trigger more buying.

"Most of the commodities, especially energies, had been very strong lately and gold has been stuck in a sideways market for the past five months," he said. "Gold is coming to terms with the idea that it needs to be an inflationary hedge."

The path towards $1,900 is very clear now, said Walsh Trading co-director Sean Lusk. "Gold below $1,800 was seen as a good buying opportunity. We have to watch if banks try to come in and hedge this thing. Prospects for the first couple of months of 2022 are good. We see a year-end rally that carries through into January and February," Lusk told Kitco News.

There is a good chance that gold could take a bit of a breather before moving higher next week, said TD Securities head of global strategy Bart Melek. Gold would have to move above $1,875 an ounce to attempt a run at its 2020 record highs of above $2,000.

"We have about two more months before the Federal Reserve has to switch to a more hawkish narrative. In the meantime, we could see significant levels in gold as more people begin to say that the Fed is behind the curve. We could attempt to reach all-time highs in early 2022," Melek said.

Once the Fed does turn more hawkish and will begin raising rates, gold's initial reaction would be to go lower. However, longer-term, gold can still post gains as Fed continues to tighten slowly, Melek noted.

"If the Fed's funds rate moves up by 25 basis points and inflation is running at 4.5%, that's is still a very accommodative policy," he said.

Data to watch

The two most significant macro events to watch next week will be Tuesday's retail sales and industrial production reports.

"The October retail sales and industrial production reports are next week's highlights and both should be strong. Retail sales will be lifted by the 6% MoM increase in new vehicle units sold – the first increase since April – while gasoline station sales will be boosted by the surge in gasoline prices," said ING chief international economist James Knightley. "Industrial production should see good manufacturing growth based on the ISM report already released."

Monday: N.Y. Empire State Manufacturing Index

Tuesday: Retail Sales, Industrial Production

Wednesday: Housing Starts and Building Permits

Thursday: Jobless Claims, Philadelphia Fed Manufacturing Index



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