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Sentiments points to bounce in gold price next week but might not be sustainable

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(Kitco News) - Gold prices appear to have created at least a short-term bottom and many analysts are looking for a bounce to at least $1,750 as sentiment in the marketplace has significantly improved.

Many analysts have said that gold has become an attractive bullish contrarian play as sentiment and speculative positioning have fallen to their lowest level in nears. At the same time, many are questioning the current strength in the U.S. dollar as it sees its first weekly decline in four weeks.

Chris Vecchio, senior market strategist at DailyFX.com, said that the U.S. dollar is losing momentum as the Federal Reserve's aggressive price action is now fully priced in. He added that an impending global recession and a potential sovereign debt crisis in Europe could see the U.S. dollar and gold rally in tandem.

Along with the U.S. dollar, Vecchio said there are signs that real yields could be topping out, creating another tailwind for the precious metal.

"A debt crisis in Europe isn't guaranteed, but it is lurking in the shadows and as long as there are concerns about the euro, there is room for gold and the U.S. dollar to both trend higher," he said.

However, Vecchio added that he sees a limit to gold's strength with solid resistance at around $1,760 an ounce. He said that in the current environment, investors should prepare for higher volatility.

"It would take a complete collapse in real yields to change gold's current trend and that is unlikely to happen," he said.

This week 18 Wall Street analysts participated in Kitco News' gold survey. Among the participants, 12 analysts, or 67%, we're bullish on gold in the near term. At the same time, six analysts, or 33%, were bearish on gold. There were no neutral votes cast this week.

Due to technical issues, only 187 votes were cast in online Main Street polls. Of these, 105 respondents, or 56%, looked for gold to rise next week. Another 52, or 28%, said lower, while 16 voters, or 31%, were neutral in the near term.

Kitco Gold Survey

Wall Street

Bullish
Bearish
Neutral

VS

Main Street

Bullish
Bearish
Neutral

The renewed bullish sentiment comes as gold prices look to end a five-week losing streak. August gold futures last traded at $1,729.10 an ounce, up 1.5% from last Friday.

For many analysts, the biggest factor driving gold prices remains the U.S. dollar, driven by the Federal Reserve's aggressive monetary policy action; however, some analysts have noted that the slowing activity in the U.S. economy could prompt the Federal Reserve to ease its tightening stance.

Friday, preliminary data from S&P Global Market Intelligence shows that activity in the U.S. manufacturing and service sectors dropped to their lowest level in two years. The drop in activity reflected a similar weakness in Europe.

"The market is sensing that the rate hiking cycle will end sooner because of rapidly slowing growth. Friday's U.S. services PMI was shockingly soft and means the Fed will pause around 3% and is likely to cut in 2023. When those cuts truly come into view, gold will surge on USD weakness," said Adam Button, chief currency strategist at Forexlive.com.

Adrian Day, president of Adrian Day Asset Management, said that despite the U.S. central bank's extraordinary pace of rate hikes, inflation will remain persistently high, keeping real yields under pressure.


Is the bottom in? Gold could see a bullish correction, bouncing off $1,700 - Moor Analytics

"The market will soon realize that the Fed simply cannot raise rates sufficiently to tame inflation without causing a serious recession, and that what they are doing so far is insufficient to bring inflation down meaningfully," he said. "The Fed does not even have to pivot or pause; the mere recognition that they cannot achieve their objective will cause gold to explode."

However, not all analysts are optimistic that gold's fortunes are reversing and that the U.S. dollar has topped out. Some analysts have said that in global financial markets, the greenback remains an important safe-haven asset.

"The rally may have paused, but the dollar's uptrend is still there. It remains the strongest currency in the market," said David Madden, market analyst at Equity Capital.

Madden said that he sees gold struggling at resistance at $1,745 and would look to sell rallies.

Along with cloudy fundamentals, Jim Wyckoff, senior technical analyst at Kitco.com, said that despite gold's bounce, the technical picture remains bearish.

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.