(Kitco News) - Low trading activity, easing economic fears, and reduced geopolitical tensions are taking their toll on gold and silver as prices test key support levels. However, sovereign debt concerns and ongoing central bank demand are expected to limit the downside through the summer.
Jesse Colombo, an independent precious metals analyst and creator of the Bubble Bubble Report, said investors should prepare for lower prices in the near term, as the summer trading season kicks off next week with the July 4 long weekend.
Colombo sees gold prices stuck in a broader trading range between $3,200 and $3,500 an ounce. Gold last traded at $3,271.49 an ounce, down nearly 3% on the week. Despite the decline, the yellow metal is holding initial support at $3,250 an ounce.
In addition to the seasonal summer lull impacting the gold market, improving economic sentiment is emerging as the U.S. government signals progress on trade deals and a cease-fire between Israel and Iran eases geopolitical tensions.
“With the U.S. and China finalizing a trade framework and Israel/Iran honoring a cease-fire agreement, investors are rushing back toward risk assets at the expense of safe havens. This improving market mood could spell more pain for gold ahead of another busy week for global markets,” said Lukman Otunuga, senior market analyst at FXTM.
“Overall, gold is turning bearish and heading for its second consecutive week of losses. A weekly close below $3,300 may open a path toward $3,250 and possibly the psychological $3,200 level. Should prices push back above $3,300, this may trigger a rebound toward $3,330 and $3,360,” he added.
Despite growing downside pressure, Colombo said gold is being supported by more than just one or two drivers. Beyond geopolitical safe-haven demand, the unsustainable rise in sovereign debt and renewed growth in the global M2 money supply will provide solid support for gold through the summer, he said.
“So far this year, the M2 money supply has surged by $1.2 trillion, as U.S. national debt hits $37 trillion,” he noted. “We could see some further selling pressure in gold, but I am not worried about this correction.”
Robert Minter, Director of ETF Strategy at abrdn, also expects gold prices to continue consolidating as the Federal Reserve maintains a neutral monetary policy.
This past week, in his two-day testimony before Congress, Federal Reserve Chair Jerome Powell reiterated that the central bank is in no hurry to cut interest rates, as inflation risks remain uncertain.
“For the time being, we are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” he said.
Minter added that he expects the central bank to reduce the Fed Funds rate soon. He noted that the yield on two-year bonds is about 80 basis points too high compared to interest rates.
“Gold prices could continue to consolidate, but the next leg of this rally will come from traditional investment demand, as the Federal Reserve will likely cut interest rates by at least 50 basis points before the end of the year,” he said.
While gold is expected to continue consolidating, Minter sees a solid floor above $3,000 an ounce. “Gold’s current price is completely justified by the amount of debt issuance,” he said.
Some analysts note that gold is not only an attractive monetary asset amid rising global government debt, but also a hedge against weakening purchasing power as the U.S. dollar loses ground.
The U.S. dollar index is ending the week near a fresh three-year low, testing new support at 97 points.
Naeem Aslam, Chief Investment Officer at Zaye Capital Markets, said he remains bullish on gold as the U.S. dollar continues to weaken.
“Most investors view the dollar index with a bearish outlook and expect a rate cut. Currently, if we look at the price of gold, it becomes clear that any further weakness presents a buying opportunity. That said, the return of risk-on sentiment may limit the upside, especially in the absence of geopolitical tensions,” he said.
In a note published Friday, Aaron Hill, CMT, Chief Market Analyst at FP Markets, said he doesn’t expect significant selling pressure in the U.S. dollar until gold prices fall to 96.5 points.
While gold will likely remain on the back foot, next week’s shortened calendar could bring heightened volatility due to major economic reports, including June’s nonfarm payroll numbers, which will be released on Thursday due to the July 4 holiday.
Economic data to watch next week:
Tuesday: ISM Manufacturing PMI, JOLTS Job Openings
Wednesday: ADP Non-Farm Employment Change
Thursday: U.S. nonfarm payrolls, US weekly jobless claims, ISM Services PMI
