(Kitco News) - After two weeks of losses, the gold market has managed to gain some bullish traction, pushing back above $4,700 an ounce.
Although gold still has a ways to go before it breaks out of its broad sideways pattern, some analysts note that Friday’s gains are unexpected given the current environment.
Gold managed to push back above near-term resistance after both Iran and the U.S. acknowledged some progress toward a lasting peace agreement; however, the ceasefire has been complicated by a flare-up in aggression from both sides ahead of the weekend. Spot gold prices last traded at $4,722.60 an ounce, up more than 2% on the week.
The new conflict has had a limited impact on oil prices, with West Texas Intermediate (WTI) crude oil prices holding below $100 a barrel. Relatively controlled energy prices have helped reduce inflation fears, giving the gold market some room to catch its breath.
Neil Welsh, Head of Metals at Britannia Global Markets, said that this could be an indication that sentiment around the war with Iran is starting to shift.
“What stands out is how little impact the latest Middle East flare-ups have had on risk sentiment, potentially suggesting investors are treating these episodes as contained rather than systemic. That shift in behaviour is helping gold stabilise even as oil and equities move independently of traditional crisis patterns,” he said.
Ole Hansen, Head of Commodity Strategy at Saxo Bank, said that he also sees a shift in investor sentiment.
“The market almost seems to have moved on from the Middle East war on the assumption that the appetite for conflict is reduced on both sides. That said, we are still a long way from a peace deal, with both sides looking for a deal they can call a victory. How they manage that is the big question and one that is holding up the prospects,” he said.
Along with geopolitical uncertainty, the gold market has also been able to navigate further resilience in the U.S. labor market. Official government data showed on Friday that the economy managed to create 115,000 jobs in April, significantly beating expectations.
At the same time, wage pressures were lower than expected, and the unemployment rate was unchanged at 4.3%.
Analysts note that the relatively robust labor market data give the Federal Reserve room to focus on the persistent inflation threat as part of its dual mandate, which means the central bank could keep interest rates unchanged for the foreseeable future.
According to the CME FedWatch Tool, markets see a 14% chance of a rate hike by the end of the year. While those odds are still low, last week there was only a 9% chance of tightening, and one month ago there was less than a 1% chance of a hike.
Although markets do see a small chance of a rate hike, analysts have said that the gold market is dismissing that threat, as investors still have to wade through a lot of economic uncertainty. Analysts have pointed out that inflation is currently being driven by supply-side issues, and a rate hike will not be able to fix these problems. They added that any demand destruction could push the economy into a recession.
However, analysts warn that precious metals could be sensitive to key inflation data next week with the release of April’s Consumer Price Index and Producer Price Index. Economists have said that investors and traders need to pay attention to core inflation data to see if inflation has become embedded in the broader economy.
Along with next week’s inflation data, markets will also be paying close attention to a potential U.S. Senate vote to nominate Kevin Warsh as the next Chair of the Federal Reserve. Warsh has shown his support for cutting rates this year to stimulate the economy; however, he has also proposed reducing the Federal Reserve’s balance sheet, which could reduce market liquidity.
Some analysts have said that, despite his dovish tilt, with inflation elevated, it is unlikely there will be enough support for a rate cut, which could limit gold’s bullish momentum.
Looking at the precious metal’s technical outlook, analysts have said that gold is still caught in a broad consolidation pattern.
Nick Cawley, market analyst at Solomon Global, said that despite the geopolitical flare-ups, as long as peace negotiations continue, markets are likely to keep pushing oil prices and global inflation expectations lower, which should help gold and silver prices grind higher.
“A break and close above the April 17 high of $4,890/oz. would negate this pattern and bring $5,000/oz. into view as the next near-term target. A close above the 50-day SMA would also add a bullish tailwind,” he said.
Hansen said that he needs to see a clear break above $4,850 an ounce, but at the same time, investors should watch for buying opportunities.
“With U.S. economic data showing a certain amount of robustness despite worsening affordability, we may need to be patient. On the other hand, I see dips in the market attracting buyers, with managed money accounts mostly sidelined while waiting for a trigger, i.e., a technical signal, which is currently non-existent,” he said.
Economic data to watch next week:
Monday: US existing home sales
Tuesday: US CPI, tentative Senate vote on Warsh Fed nomination
Wednesday: US PPI
Thursday: US weekly jobless claims, US Retail Sales
Friday: Empire State Manufacturing Survey
