(Kitco News) - A new divergence between the Federal Reserve’s interest rate forecast and market expectations could create some volatility in the gold market in the near term. However, some analysts note that as the precious metal continues to consolidate, it will be more important to watch technical levels.
James Stanley, Senior Market Strategist at Forex.com, said that the fundamental outlook, dominated by geopolitical uncertainty and rising debt levels, remains supportive for gold. However, he added that the short-term technical outlook is a little more precarious, as the price action is forming a bearish head-and-shoulders pattern with a neckline support zone between $2,300 and $2,275.
“The neckline hasn’t broken yet. It’s been close but no cigar,” he said. “As long as the $2,300 area remains defended, I’m still bullish. I don't want to take a bearish stance on gold until we have that head and shoulders starting to fill in.”
Stanley’s cautious outlook comes as gold prices look to close the week with solid gains. August gold futures last traded at $2,349.50 an ounce, up 1% from last Friday’s close.
Stanley added that if gold breaks below his initial support levels, he would not be surprised to see prices fall all the way to $2,100 and retest critical support at $2,075, which was roughly a three-year resistance line prior to this year’s breakout.
Alex Kuptsikevich, Senior Market Analyst at FxPro, said that although gold has managed to hold support at $2,300 in its last two tests, this level is looking a little fragile. He noted that a combination of weak equity markets and a strong U.S. dollar could create some headwinds for the precious metal in the near term.
“In 2008, 2011, and 2020, the initial rise in the value of an ounce against a background of falling stocks and a rising dollar quickly reversed into a collapse in the gold price,” he said. “It is worth keeping a close eye on how events in the currency and stock market unfold. And if the risk-off continues, buying gold will be as dangerous as picking up pennies in front of a train.”
Although gold’s downside risk is growing, Stanley said that he expects a drop will create long-term value in the market.
“If I’m looking at gold a few years down the road, I am pretty sure that prices are going higher as the government continues to spend money and take on more debt,” he said. “A deeper pullback will create a long-term buying opportunity.”
However, other analysts are expecting gold to continue to shine as selling pressure in the equity market is due to geopolitical uncertainty. France’s snap election, called at the start of the week following the European Union elections, has roiled markets.
Investors fleeing French equities and bonds have pushed the spread between French and German 10-year yields to nearly 70 basis points, its widest level in seven years.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that this uncertainty is one reason why gold has held up against renewed momentum in the U.S. dollar.
“U.S. dollar strength, which normally should weigh on precious metal prices, has so far not materialized. The reason being the strength is driven by euro weakness after the French president shocked investors by calling a snap vote after his party suffered a crushing defeat in European parliamentary elections,” he said. “The market fears a repeat defeat to the far-right party could trigger a debt crisis, potentially adding support to gold from worried investors.”
Hansen said that he also expects gold to be well-supported as central banks remain stoic buyers, even after data from the People’s Bank of China showed it didn’t add any gold to its reserves last month.
“China, a major driver of the gold rally in the past year, is in our opinion nowhere near done buying gold, but the pause also highlights they are human, balking at the prospect of paying record prices. Also, the recent attention paid to Chinese private buying has likely thrust them into a spotlight they normally avoid,” he said.
Fawad Razaqzada, Market Analyst at City Index and founder of TradingCandles.com, said he sees gold’s rebound from last week’s selloff as a solid sign of strength as it continues to consolidate. He noted that there was no follow-through selling from last week, which saw the biggest drop in two years.
“A potential rally could be on the horizon now that the Fed meeting and CPI data are both out of the way. The bulls have pushed gold above short-term resistance at $2,330. Now an ideal scenario would be to push it past the short-term bearish trend line around $2,360,” he said. “However, the short-term XAUUSD forecast will become slightly bearish if there is another daily close below $2,300 in the week ahead, which could lead to further short-term selling toward the next support level at $2,222.”
The growing focus on gold’s technical price action comes ahead of a fairly light week for economic data.
Markets will receive some regional and preliminary manufacturing data and some housing data.
With the Federal Reserve’s monetary policy decision wrapped up, markets will turn their attention to Europe as the Swiss National Bank and the Bank of England will announce their monetary policy decisions next week.
The SNB was the first central bank to kick off the global easing cycle as it lowered interest rates at its previous meeting. Economists are expecting to see another cut.
In England, the BoE is expected to keep rates unchanged at 5.25%. However, analysts have said that they expect the central bank will start to lay the groundwork for an August cut.
Although the Federal Reserve has been reluctant to embark on an easing cycle as inflation remains elevated, many analysts have said that falling interest rates worldwide remain supportive for gold in the global context.
