(Kitco News) - The gold market continues to recover from Friday’s selloff as prices trade around $2,900 an ounce, and while analysts think the yellow metal is looking a little overbought, one analyst says that there is still plenty of upside potential in the near-term.
In his latest gold report, Tim Hayes, Chief Global Investment Strategist at Ned Davis Research, said growing weakness in the U.S. dollar and falling bond yields bode well for gold in the near-term.
“The potential threats posed by rising bond yields and a strengthening U.S. dollar have both diminished,” Hayes said in the note. “A bearish reading on our short-term dollar composite is casting a bullish vote in our Gold Watch report. And reversals in the momentum of both the expected 10-year real Treasury yield and TIPS yield have moved those indicators closer to renewed bullish readings.”
Hayes’ bearish outlook on the greenback comes as the U.S. dollar index hovers near a two-month low at 106.74 points.
Looking beyond gold’s short-term volatility, Hayes said that the precious metal is still within the early stages of both cyclical and secular bull markets. He noted that in December investor sentiment indicators were fairly negative but have moved into neutral territory but the indicators are still well below excessive optimism readings that would warn of a topping process.
“The gold uptrend looks even less overdone when compared to the M2 money supply,” Hayes said in the report. “In contrast, the U.S. Dollar’s ratio to its long-term trend has risen far into its zone of top 20% of readings. Over subsequent periods ranging from one to 10 years, dollar weakness has followed readings in that zone.”
Hayes noted that investor sentiment is improving as gold remains an attractive safe-haven asset and hedge against economic and geopolitical uncertainty.
“The Global Economic Uncertainty Index has risen to a level only exceeded by levels reached in the midst of the pandemic worry of 2020. The index has been trending higher with gold over the past 10 years,” he said. “If an escalating trade war would lead to rising inflation, gold would be threatened by the likely bond yield rise and reduced chances of central bank easing. Otherwise, gold would stand to benefit not only from dollar depreciation but also the continuation of U.S. real money supply growth and the growth of fiscal expenditures minus receipts, all components of the U.S. Real Monetary, Fiscal and Exchange Rate Policy Index.”
