Gold Bulls 'Holding All The Cards' Next Week Despite Consolidation Talk

New York (Spt 8)  Analysts remain bullish on gold next week but warn that some further consolidation is unavoidable after the yellow metal hit a fresh one-year high on Friday.

The precious metal surged above $1,360 by the end of this week, while the U.S. dollar sunk to more than two-year lows amid geopolitical tensions surrounding North Korea, fading Federal Reserve rate hike expectations and destruction caused by Hurricane Harvey.

Towards the end of the day on Friday, the metal cooled off, with December Comex gold last seen trading at $1,351.10, up 0.06% on the day.

Analysts pointed out that the North Korea situation is not going to go away next week, adding that they will be watching it very closely.

“The North Korean crisis and whether there will be any development on that front is key. If it comes back in the news with possible escalation, it will benefit gold,” Simona Gambarini, analyst at Capital Economics, told Kitco News.

Also, all eyes will be on Hurricane Irma and any additional economic implications, which could put more pressure on the Fed to adapt a more dovish stance.

“Harvey hit Texas, impeding the U.S. economy over the next quarter or two. We saw unemployment go up because of it. Irma doesn’t look good either. We could very well have more problems on the eastern seaboard because of Irma, on top of disruptions in Texas,” said Bart Melek, head of global strategy at TD Securities.

Peter Hug, Kitco’s global trading director, also confirmed that gold’s price moves next week will be largely dependent on the outcome of Hurricane Irma, which is currently approaching Florida.

“Right now, it’s a bet on Irma,” Hug said. “If it hits directly, gold goes up. If it skirts the coast, I see some profit-taking next week, as the dollar should bounce. Tracking shows a direct hit so I think up in gold, but I hope I am wrong [about potential hurricane damage].”

Other primary drivers – global uncertainty and weak U.S. dollar – will remain in place as well, noted Lukman Otunuga, research analyst at FXTM. “With uncertainty across the board and overall caution likely to stimulate the flight to safety, safe-haven assets such as gold remain heavily supported,” Otunuga pointed out.

Melek added that given geopolitical tensions and a dysfunctional Congress, gold will eventually move to $1,375 an ounce. But first, traders might see some consolidation, as gold might be topping out. “It might go down from its recent highs of $1,357. Support has moved to mid $1,330s,” he said.

Christopher Louney, commodity strategist at RBC Capital Markets, also views the current gold rally as overextended.

“We have recommended gold as a risk overlay for some time now, albeit we do think that the current rally looks overextended. In fact, our base case is for these risks to recede at least somewhat, leaving gold to contend with possible physical demand destruction, and the resultant shifts in retail and other investor demand to say the least (the risks to this view center on North Korea and congressional (in)action),” Louney said.

Yet, Kitco’s senior analyst Jim Wyckoff is not expecting the pullback in gold to be significant. “Sellers are likely to remain very timid,” he said. “The gold market bulls are still holding all the good cards heading into an uncertain weekend.”

Macro Data

Next week’s data focus will be on the U.S. Producer Price Index (PPI), Consumer Price Index (CPI) and Retail Sales releases scheduled for Wednesday, Thursday, and Friday, respectively.

“We are going to be very much data watchers. Starting mid-week we’ve got PPI and CPI (key number for August since it is the one the Fed is worried about),” Melek said. “Right now, there is no impetus for the Fed to get tighter. And it has been talking dovish of late because of lack of inflation, retail sales, and hurricane developments.”

This week's jobless claims data disappointed, as the U.S. Labor Department report showed Thursday that initial weekly jobless claims surged by 62,000 to a seasonally adjusted 298,000, citing impact of Hurricane Harvey. The new tally marked the highest level since April 2015.

“The change in weekly unemployment claims was important, as in the next few weeks it could have a negative impact on September’s nonfarm payrolls and that could benefit gold,” said Gambarini. “Employment data have been consistently strong over the past couple of years and promoted the Fed to hike. If there is a weakening on the back of hurricane effects, it could impact Fed decisions later this year.”

Levels to Watch

Analysts believe the $1,400 level remains a possibility for gold down the line. “If gold can trade sustainably at and above $1,350, then it could easily reach $1,400,” said Gambarini.

Yet, Melek said that $1,400 might not be possible without some more certainty around any rate-hike delays.

“So long as there is still a chance the U.S. central bank pulls the trigger on the higher Fed funds [rate], along with the risk of three more hikes next year, money managers will have difficulties to justify growing long positions past their current extreme levels, or to erode short exposure anymore,” he said. “A sustained run into $1,400/oz is unlikely to happen until the market eliminates a few hikes from its projections.”

In the short-term, Otunuga noted that a breakout above $1,350 may open a path higher towards $1,365. “Daily bulls remain in firm control and are likely to secure more control if gold concludes the week above $1340.”

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