Gold Could Even Dip to $1,300 Near Term, But Don’t Worry Say Analysts
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However, analysts are not ready to count the market out just yet even if prices continue to fall next week.
December gold futures last traded at $1,345.60 an ounce, down less than 1`% on the week with most of the selling pressure coming Friday after the U.S. labor market said that 255,000 jobs were created July, well above expectations for job gains of 180,000. Silver turned heads on Friday with prices last trading at $19.81 an ounce, down almost 3% on the week.
The jobs report not only boosted equity markets and the U.S. dollar, but also raised expectations for an interest rate hike later in the year. However, despite all these headwinds for gold, analysts noted that the metal is holding up fairly well.
“If we had this strong of a report last year I think we would have seen a much stronger selloff in the gold market,” Georgette Boele, coordinator of FX and precious metals strategy at ABN AMRO, told Kitco News. “Everything considered, I think gold prices are pretty resilient right now.”
Bill Baruch, senior commodity broker at iiTrader.com, said that it is not surprising to see gold under pressure as there was significant buying momentum ahead of the report from investors still digesting last week’s poor gross domestic product data and loose monetary policy announcement from the Bank of England.
“We saw a big move up and then there was a technical failure at major four-star resistance and that has caused a bit of panic selling,” he said. “We are definitely going to see more liquidation in the next couple of session but that just sets up new buying points.”
Are Interest Rate Expectations Really Going Up?
The positive U.S. employment data has helped boost interest rate expectations for this year; however, the market probabilities are still well below the key level of 50%. Economists have noted that the Federal Reserve has never hiked interest rates when the Fed Fund futures have priced in less than a 50% chance of it.
Looking at CME 30-Day Fed Fund futures, expectations jumped higher with markets now pricing in an 18% chance of a move in September. There is also an 18% chance of a rate hike in November; at the same time, markets are pricing in a 45% chance that interest rates will be 25 basis points higher in December.
Expectations for the first rate hike doesn’t hit the 50% level until March 2017.
“Speculation of a rate hike may be growing but they are still at really low level and that will be positive for gold,” said Boele. “The employment data doesn’t change our expectations as we see no rate hike until 2017.”
Eugen Weinberg, precious metals analyst at Commerzbank, said that gold could head lower in the near-term on growing interest rate hikes but added that September is still not on the table, which will limit gold’s selloff in the near-term.
U.S. Remains The Shining Light In A Gloomy World Of Negative Rates
Philllip Streible, senior market analyst at RJO Futures, said that he could see gold struggle to hold onto near-term gains next week as the jobs report creates some optimism for the U.S. economy. He noted that investors will feel more comfortable to take some profits in gold and move into equity markets in the near-term.
“The employment report was a small ray of light, but the reality is that the rest of the world looks dark and gloomy,” he said. “But, negative interest rates around the world are just too great for investors to ignore for very long.”
Weinberg agreed that although gold prices could continue to fall in the near-term, negative bond yields will continue to be the biggest driver for the gold market. He added even if the U.S. does raise interests rates by 25 basis points, it won’t make much of a difference in the global marketplace, where investors are actually paying to hold more than a quarter of all global sovereign debt.
Earlier this week, Axel Merk of Merk Investments, in an exclusive interview with Kitco News, said that it makes sense to own gold in a negative rateenvironment because it has a low correlation to overpriced equities and there is no third-party risk.
Levels To Watch
It is a relatively quiet week ahead for economic data so technical levels could be important factors to watch for gold investors.
Baruch said that the first support level to watch is $1,340, which gold managed to hold Friday. A break below that level could lead to a test of $1,320, which has held as support since the Brexit breakout in late-June.
Streible is watching the $1,320 level while slightly more bearish Weinberg said $1,300 gold is realistic in the near term.
“We haven’t spent much time above $1,300 and that is the key level to watch,” Weinberg added.
Chris Beauchamp, market analyst at IG, said that with gold looking a little overextended, there is a chance that prices could hit $1,305 an ounce in the near-term.
The Final Say
Little economic data next week means market participants can take a short vacation; however, they might want to be back for the end of the week as markets will receive July retail sales data.
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