(Kitco News) - The gold market continues to hold support above $3,300 an ounce, but shifting sentiment in the global economy is taking its toll. According to some analysts, the precious metal is looking a little exhausted.
Although gold is ending the week down sharply from Tuesday’s high above $3,400 an ounce, it has managed to recover the losses seen the previous week, when prices fell to support at $3,200 an ounce.
Spot gold last traded at $3,336.84 an ounce, up more than 3% from last Friday.
James Stanley, Senior Market Strategist at Forex.com, said he expects gold prices to remain elevated, even if the upside is limited.
“We can't say that bulls are done, but at the same time, I don’t expect them to take out $3,500 any time soon,” he said. “Given how parabolic that trend has been, and how support levels have held, I would still hesitate to do anything on the short side.”
Gold’s relatively neutral price action this week comes after the Federal Reserve reiterated that it is in no hurry to lower interest rates, as the U.S. economy remains relatively stable and inflation risks remain elevated.
Although the central bank is still expected to cut interest rates during the summer, some analysts have said that gold’s bullish momentum has shifted into a “wait-and-see” mode.
“Institutional traders think it is pretty much priced in that there will be a rate cut by the Fed in July, so we do think a large portion of that good news is already baked in,” said Naeem Aslam, Chief Investment Officer at Zaye Capital Markets.
Aslam said that in the near term, he sees the path of least resistance for gold as potentially lower; however, he added that he expects dips to continue being bought.
“We believe the long-term trend is still to the upside, and gold prices will top $3,500 as geopolitical tensions remain very much in place,” he said.
Gold will be sensitive to trade talks this weekend
According to analysts, the biggest near-term risk for gold is growing optimism that President Donald Trump and his administration will eventually end the trade war with China, as the two nations begin negotiations this weekend.
The meeting, to be held in Switzerland, comes after the Trump Administration announced an agreement with the U.K. government. In the plan outlined on Thursday, the U.S. would maintain a 10% import tax on most U.K. goods but also agreed to roll back some of the import taxes recently imposed on strategic sectors such as cars and steel.
Although the agreement was announced this week, it has not yet been finalized.
Michael Brown, Senior Market Analyst at Pepperstone, said there are growing expectations that the U.S.-China talks will lead to a de-escalation in geopolitical uncertainty. He added that this would not be a positive environment for gold and sees potential for prices to test support at $3,000 an ounce.
“A de-escalation in tensions or reduction in some tariffs would indeed be a catalyst for the sellers to wrestle back control, at least in the short term. That gains have stalled out in the mid-$3,400/oz region twice now is also a sign that the rally might be getting a bit exhausted in the short term too,” he said.
However, Brown added that he also sees any correction as a long-term buying opportunity.
“The bull case for gold remains one where the yellow metal stands as the only real haven amid ongoing political and geopolitical uncertainty, while also standing to benefit from inflows as a result of numerous nations—particularly in emerging markets—diversifying their reserves using things like bullion. No matter what happens on the trade front, given the incoherence and volatility with which U.S. policy continues to be made, it’s tough to envision these positive diversification flows dissipating anytime soon,” he said.
Looking beyond global trade-induced geopolitical uncertainty, analysts said that given the Federal Reserve's hesitancy to loosen monetary policy, next week’s inflation data could create some volatility in the gold market.
The growing inflation threat presents a mixed opportunity for gold. Higher inflation will force the Federal Reserve to maintain its neutral stance, keeping interest rates elevated; however, higher interest rates could weigh on the U.S. economy and potentially push it into a recession. At the same time, higher inflation will lower real interest rates, which is positive for gold as a non-yielding asset.
Economic data to watch next week
Tuesday: US CPI
Thursday: US PPI. US Retail Sales; US weekly jobless claims, Empire State Manufacturing survey, Philadelphia Federal Reserve Manufacturing survey, Federal Reserve Chair Jerome Powell to speak in Washington, DC
Friday: Preliminary University of Michigan Consumer Sentiment Survey
