(Kitco News) - The gold market continues to defy gravity as the market pushes close to December’s all-time highs. Although the market is looking a little overstretched, some analysts have said the momentum drive is just starting, and the market still has room to run higher.
Ahead of the North American session, April gold futures pushed to within a couple of dollars of their all-time highs, while the market has dropped from its highs, it is still holding on to solid gains. April gold futures last traded at $2,137.60 an ounce. Even with this pullback, gold prices are up nearly 5% from Thursday.
In a note to Kitco News, the CME noted that recent volatility in gold and silver support higher prices in the near-term.
“Looking at our volatility index (CVOL), options traders are more heavily positioning for upside risk, with the Silver call skew ratio reaching a 7-month high and Gold call skew ratio reaching a 3-month high,” analysts at CME said in the note.
The CME explained that the skew ratio measures the difference in implied volatility between calls and puts. The ratio normalizes the comparison of relative put call volatility between different asset classes and products. When the skew ratio is above 1, this indicates more call volatility, when it dips below 1, this indicates more put volatility.
David Morrison, Senior Market Analyst at Trade Nation, said that the question many investors are now asking is whether or not gold’s price action will be similar to the December run to all-time highs. The precious metal rallied to $2,152.30 in illiquid trading during the Asian session; however, gold was unable to hold those gains and ended the day significantly lower, closing the North American session at $2,042.20 an ounce.
However, Morrison said that momentum in the market feels a lot different than it did a few months ago.
“Gold has been building a base ever since it broke back above $2,000 in mid-February. Upside momentum has also been building steadily. While a pullback is certainly possible, it would be surprising to see gold give back all its gains from last week,” Morrison said in a note Tuesday.
Alex Kuptsikevich, Senior Market Analyst at FxPro, said that although momentum indicators are elevated, gold still has room to run higher. He added that with its current momentum, gold could target $2,255 an ounce, representing a key Fibonacci projection level.
“Gold is primed for a substantial move, second only to cryptocurrencies,” he said in a note Tuesday. “Sometimes, gold avoids volatility for weeks, but at certain moments, strong multi-day trends are born, and the movement becomes almost one-sided, as we saw this time.”
Kuptsikevich said he is currently watching gold’s Relative Strength Index, which is trading near its highest level since March 2022.
“The RSI reached even higher levels in July-August 2020, and we see more similarities with this particular episode. The overbought RSI then, as it is now, coincided with the entry into the historical high area above $1800. Technically, it wasn't an all-time high, as it is the case now, but it was a move out of a steadily traded range (then $1800, now $2050), and that is what matters,” he said in a note.
While many analysts are optimistic about gold as momentum takes over, some warn that the market still faces some major tests.
Ricardo Evangelista, Senior Analyst at ActivTrades, said that the Federal Reserve’s monetary policy remains the biggest threat to the gold market.
Analysts note that stubborn inflation could force the Federal Reserve to maintain its aggressive monetary policy for longer than expected. Some economists are even starting to price out all rate cuts this year.
“Given this backdrop, this week's data releases, including US services PMI and labor figures, along with Jerome Powell's testimony to the US Congress, will be closely monitored by traders, likely impacting gold prices accordingly,” Evangelista.
Some analysts have also noted that a one-sided rally in gold has traditionally not created sustainably higher prices. While gold has seen significant momentum in the last four days, silver prices are rising only modestly.
The white metal is only just starting to see a surge as prices push above $24 an ounce. May silver futures last traded at $24.22 an ounce, up nearly 1% on the day. Meanwhile, the gold/silver ratio remains fairly elevated, trading above 88 points.
