(Kitco News) - A one-two punch has knocked gold down to the canvas, but although prices have room to move lower, analysts have said that investors should view this correction as a strategic buying opportunity.
Although gold continues to consolidate in a broad range, the precious metal is ending the week with massive volatility. Disappointing economic data helped push gold prices to initial resistance at $2,400 an ounce mid-week; however, that bullish momentum has proven unstainable as the market ends Friday in solidly negative territory, extending its losing streak to three weeks.
August gold futures last traded at $2,325.60 an ounce, down more than 2% on the day. Meanwhile, the precious metal is down nearly 1% from last Friday.
Silver is also being dragged lower, extending its losing streak to three consecutive weeks. July silver futures last traded at $29.46 an ounce, down 6% on the day and down 3% for the week.
The selloff started early Friday after data from the People’s Bank of China showed that the central bank did not buy gold last month, ending a record 18-month shopping spree. The disappointing news caused gold prices to drop by nearly $20.
While on the ropes, the market was hit with another $20 drop following more disappointing data. The U.S. economy created 272,000 jobs in May, significantly beating expectations. At the same time, wages increased by 0.4%, also beating expectations.
At first blush, the economic data prompted markets to once again shift their interest rate expectations and start pricing a potential rate cut in September off the table.
Although gold has suffered some significant blows, it is not down for the count.
Christopher Vecchio, Head Of Futures and Forex at Tastylive.com, said the employment numbers were not as healthy as the market thinks. He pointed out that there was a massive discrepancy between the government numbers and the household survey. The government numbers show robust gains; however, the household survey showed job losses of 408,000.
At the same time, there was a sharp drop in full-time positions and a rise in part-time employment.
“The data reflects what we are seeing in other reports, that labor market growth is starting to slow,” Vecchio said.
Analysts are also shrugging off China’s disappointing news that it didn’t increase its gold reserves last month. Many analysts have said it's not surprising that the central bank is taking a break after buying gold for 18 straight months. Many analysts see this as a short-term pause.
Michelle Schneider, Director of Trading Education and Research at MarketGauge, said that despite gold and silver’s selloff, there has been no fundamental change in the market.
‘We still have geopolitical uncertainty, we still have inflation, and we still have government debt and spending rising uncontrollably,” she said. “These are all factors that continue to support gold and silver.”
Schneider added that for gold’s long-term bull market to send, world peace would have to break out, and inflation would have to fall back to 2%.
“That seems a little far-fetched for me right now,” she said.
Vecchio said that his year-end target remains $2,575 an ounce even with this pullback.
Although gold’s fundamentals remain strong, analysts are not expecting investors to rush into the market to try and catch the falling knife. Schneider said that gold prices could easily fall 10% in a normal correction, pushing support down to $2,200.
Alex Kuptsikevich, senior market analyst at FxPro, said he is also watching the $2,200 level.
“We may be seeing the beginning of a broad profit-taking from all the upside momentum from the lows of October to the peak in May,” he said. “The current move does not look like one that will end quickly. We should be prepared for gold to dive into the $2,200 area in the next few weeks, which would bring the price back to just above the March consolidation area and correct it to 61.8% of the October-May rise.”
Lukman Otunuga, Manager Of Market Analysis at FXTM, said that while the bears are in control, there is still a chance for prices to recover next week.
“The scales of power have swung back in favor of bears with further downside on the cards unless markets find fresh hopes of Fed cuts. This takes us to the week ahead, when the focus falls on the U.S. CPI and Fed decision,” he said.
Economists have said that while the stronger-than-expected employment data was surprising, the Fed remains more focused on inflation. A weak CPI report could put a September rate cut back on the table.
Along with the U.S. Consumer Price Index data, economists have said that markets will be sensitive to what the Federal Reserve has to say.
The U.S. central bank is not expected to cut rates in June or July, but next week’s meeting could continue to set the stage for rate cuts later in the year, which some analysts have said remains bullish for gold.
“The risk is that the chairman appears somewhat optimistic given the recent evolution of the US consumer, and if the May CPI report shows further inflation progress. We also look for the dot plot to show two cuts as the median for 2024 and four for 2025,” said bond market strategists at TD Securities.
Economic data to watch next week:
Wednesday: U.S. CPI, Federal Reserve monetary policy decision
Thursday: U.S PPI, weekly jobless claims, Bank of Japan monetary policy decision
Friday: Preliminary University of Michigan Consumer Sentiment
