(Kitco News) - Although gold is consolidating for a third week, analysts continue to see robust strength as investors have quickly stepped in to buy dips.
“This correction over the past two weeks appears to have been nothing more than a bull flag, and it is a remarkable sign of resiliency when the U.S. dollar has one of its biggest turnarounds in years,” said Christopher Vecchio, Head of Futures & Forex at Tastylive.com.
While gold will remain volatile, analysts have said that in the current environment, with its bullish long-term fundamentals intact, dips like the one seen this past week should be bought.
“I've been saying for nearly the last six months that when it comes to gold, I have no interest in the short side. I'm essentially looking for pullbacks and opportunities to go long,” said James Stanley, Senior Market Strategist at Forex.com. “I have no reason to question the trend at this point because the push behind it is very logical: central banks around the world continue to talk dovish.”
The comments come as December gold futures last traded at $2,674.90 an ounce, up less than $10 from last week’s closing price. The gold market faced some solid selling pressure as markets continued to adjust their expectations for aggressive Federal Reserve easing. Gold’s consolidation comes as the U.S. dollar has jumped 2% since the start of the month, testing resistance below 103 points.
Hotter-than-expected consumer inflation data further reduced expectations that the Federal Reserve would cut rates by 50 basis points next month. However, analysts note that while expectations for aggressive easing have been pared back, the central bank is still on track to cut rates this year through 2025.
Stanley noted that following Thursday’s CPI data, gold had every excuse it needed to push below $2,600 an ounce but managed to hold its ground.
“Inflation isn’t going away, but it appears that there are other motives driving the market, and it is being expressed in gold; that is why these dips are being bought so quickly,” he said.
While the Federal Reserve is now leading the way in this new easing cycle, they are not alone. Next week, the European Central Bank will hold its monetary policy meeting, and there are growing expectations that it will cut rates by another 25 basis points.
“Policymakers’ dovish turn is no great surprise given the latest economic data. Activity indicators have been quite weak, with the Composite PMI pointing to the economy stagnating in Q3,” said Jack Allen-Reynolds, Deputy Chief Eurozone Economist at Capital Economics, in a recent note.
However, Vecchio also noted that falling interest rates only explain part of gold’s price action. He pointed out that deglobalization and rising government debt levels will continue to weaken the U.S. dollar, providing long-term momentum for gold.
“It doesn’t matter who is in office; deficit spending will continue,” he said.
At the same time, Vecchio said he expects China to continue challenging the U.S. dollar’s dominance as the world’s reserve currency.
“I have a very difficult time saying that if you're going to trade the gold market, you should do it on any other side but the long side right now until this exceptionally strong environment changes.”
While the U.S. economic calendar is relatively light next week, markets will receive important consumption data. Economists will be eager to see if consumer spending in the U.S. continues to remain resilient.
Some analysts note that in the near term, any strong economic data that impacts the Federal Reserve’s easing cycle could weigh on prices.
However, other analysts also say that, looking beyond economic data and interest rates, gold remains well supported as a geopolitical safe-haven asset. Chaos in the Middle East could continue to dominate investment flows next week.
“In the short term, we have geopolitical factors very much influencing the prices, and we believe this is keeping prices anchored in place. As long as investors continue to seek safety, we may see prices moving to the upside, which means that the price could reach the target level of 2,800. In the absence of geopolitical tension, we are looking at prices moving toward the 2,500 price mark,” said Naeem Aslam, Chief Investment Officer of Zaye Capital Markets.
Economic data to watch next week:
Tuesday: Empire State manufacturing survey
Thursday: European Central Bank monetary policy decision, US retail sales, US weekly jobless claims: Philly Fed manufacturing survey.
Friday: US housing starts and building permits
