(Kitco News) - The gold market may be taking a bit of a breather right now, but if this consolidation is any indication, the market still has plenty of gas left in the tank.
The most common comment the Kitco News team has heard from analysts is that gold and silver are just getting started after breaking a years-long consolidation pattern. One of the reasons why many commodity analysts are bullish on this breakout is because it has been largely ignored within the broader marketplace.
Record speculative bullish bets in gold have driven prices to record highs, but at the same time, holdings in gold-backed exchange-traded funds are holding near multi-year lows. This dry powder in the marketplace will continue to support gold’s long-term uptrend.
What will it take to reverse this trend in the general marketplace? Ironically enough, according to many analysts, lower prices. The common piece of advice from most analysts has been not to chase the market but to buy on dips, which in itself has become a problem as gold has so far seen a relatively narrow retracement.
This past week, April gold futures held solid support above $2,150 an ounce, which was the resistance point from December’s blow-off top rally. The first major retracement level to watch comes in at $2,120, and the 50% retracement level is around $2,100.
The gold market held its ground this week even as inflation remains a stubborn threat, with both the U.S. Consumer Price Index and Producer Price Index for February coming in hotter than expected.
Gold’s rally to $2,200 an ounce was largely due to expectations that the Federal Reserve would start its easing cycle in June. The latest inflation data has created some doubt regarding the timing of the central bank’s rate cut.
Heading into the weekend, markets see a roughly 50/50 chance of a June rate cut. This is down significantly compared to last week when markets saw an 80% chance of a rate cut.
Next week will be a big test for gold as the Federal Reserve meets to discuss its monetary policy and release updated economic projections. Any hawkish rhetoric that pushes back on potential rate cuts could create some selling pressure on gold.
However, as the economy continues to slow, the Federal Reserve can’t afford to sound too hawkish. Once again, Federal Reserve Chair Jerome Powell has to walk a narrow path to not spook investors.
While next week could provide investors with a new opportunity to catch the gold train higher, it is important to point out that the same factors that supported gold at $2,000 an ounce continue to support this breakout.
U.S. monetary policy has become less of a factor for gold and silver prices as geopolitical uncertainty, global economic weakness, and central bank demand have provided solid support for the precious metal.
Analysts have also noted that Asian bullion demand has not slowed even as prices have pushed to record highs.
At the same time, gold remains significantly undervalued compared to equity markets. The ratio between the S&P 500 and gold remains near the December 2021 highs.
Even if gold looks overbought, there is still plenty of value in the marketplace. And if gold does look a little too expensive, silver is still fairly cheap.
That wraps up the week. Have a great weekend!
