(Kitco News) - The gold market has extended its winning streak to three weeks, and while sentiment has improved, it remains precariously balanced on the edge of a barrel of oil, according to analysts.
Optimism in the gold market began to improve on Tuesday after the U.S. and Iran agreed to a two-week ceasefire; gold prices briefly jumped above $4,800 an ounce on the initial news but were unable to sustain those gains. Ahead of the weekend, spot gold last traded at $4,748.90 an ounce, up 1.5% from last Friday.
Analysts said that although gold’s technical outlook has improved, the market continues to face significant uncertainty, which could keep prices below $5,000 an ounce through next week.
In an interview with Kitco News, Christopher Vecchio, head of futures and forex strategy at Tastylive, said that the ceasefire remains very fragile and it is too soon to tell whether it will result in a lasting peace agreement.
“ It’s hard for me to get excited about gold knowing that we have this looming background noise,” he said. “The gold market needs it to clear an agreement, otherwise you get another round of cash raising, which will push prices lower.”
Vecchio said that he remains long-term bullish on gold but sees little opportunity in short-term trading.
“ I just haven't seen a reason to touch gold and silver while we're dealing with all this noise,” he said.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that he is also cautious on gold, even as he takes some comfort from the recent bounce in prices and improving ETF demand.
“We need to get a degree of certainty that the war in the Middle East is approaching an end, and only then will recent bullish drivers reassert themselves, potentially strengthened by an economic fallout forcing the Fed to contemplate a rate cut,” he said.
Analysts said that, in the near term, rising inflation fears remain the dominant factor in the gold market. The U.S. Bureau of Labor Statistics announced on Friday that its Consumer Price Index (CPI) rose 0.9% in March, up sharply from 0.3% in February.
While inflation has jumped, it was less than expected, as economists were looking for a full 1% increase. For the year, headline inflation rose 3.3%, in line with consensus estimates.
Although consumers face skyrocketing gas prices due to supply chain issues stemming from the Iran war, the data show that inflation has not become embedded in the broader economy.
Core CPI, which strips out volatile food and energy prices, rose 0.2% last month. For the year, core inflation rose 2.6%, up from 2.5% reported in February.
In other disappointing economic news, the University of Michigan’s preliminary Consumer Sentiment Survey showed a sharp drop in optimism and a rise in inflation expectations.
However, she added that once those inflation fears begin to weigh on growth, gold will once again become an attractive safe-haven asset.
“ Right now, the geopolitical risks are primarily an inflation shock. This is causing investors to increase their expectations for rate hikes or at least reduce expectations for rate cuts,” she said. “But eventually this goes on for, the more this becomes a growth shock which pushes down yields.”
Although the U.S. central bank is expected to remain neutral through at least the summer, analysts at TD Securities said that they still see a path for rate cuts in the second half of the year.
“We expect the Fed to be patient as the final impact from the Middle East conflict is yet to be fully absorbed by the US economy. We still see room for two 25 bps rate cuts in 26H2 on inflation normalization,” the analysts said in a note.
Analysts said that gold prices will begin to attract new bullish momentum as soon as markets realize that the Federal Reserve will prioritize economic growth over inflation.
With a light economic calendar next week, analysts expect gold market volatility to ebb and flow around peace-talk headlines. With little economic data, markets will be paying close attention to an abundance of Federal Reserve speakers.
Economic data to watch next week:
Monday: US existing home sales
Tuesday: US PPI
Wednesday: US Empire State Survey
Thursday: US weekly jobless claims, Philadelphia Manufacturing Survey
