Weekly Gold Price Outlook: Market Looks Ugly But There’s Still Potential

New Yotk (Oct 28)  There is still some optimism in the gold market among some analysts despite the threat of further weakness in the near term as the U.S. dollar has broken out of a more than three-month range.

Gold is preparing to end its second week in negative territory; however, analysts note some resilience in the marketplace as prices have managed to hold above the lows seen three weeks ago.  December gold futures last traded at $1,272.40 an ounce, down less than 1% from the previous week.

Silver prices are also ending its second week in negative territory. December silver futures last traded at $16.745 an ounce, down almost 2% since last Friday.

“I think $1,260 an ounce represents a major support level in gold and while we could see price dip below, I think it will be difficult to see a close below this level,” said Bill Baruch, president of Blue Line Futures.

Baruch added that he is optimistic on gold because a lot of negative sentiment, like an improving economy and higher interest rates, are already priced into the market.

“Ultimately, if you are a gold seller, you have already sold so I expect that any dip below $1,260 an ounce will be bought,” he said.

Ole Hansen, head of commodity Strategy at Saxo Bank, said in a recent interview with Kitco News that he remains bullish as long as prices remain above the October lows. He added that he would shift to a bearish stance if prices pushed below $1,250 an ounce.

According to analysts, the main hurdle for gold remains the U.S. dollar, with the dollar index ending the week at its highest level in more than four months. However, Baruch added that he could see U.S. dollar momentum hit a brick wall at 96.

USD Sees Best Week This Year

However, other analysts aren’t as optimistic that gold can rally as U.S. dollar momentum fades. Chris Vecchio, senior currency strategist at Dailyforex.com noted that the U.S. dollar index is seeing its best gains this week so far this year.

He added that the latest report on U.S. gross domestic product, which showed 3% growth in the third quarter, shows improvement in the U.S. economy, which supports more monetary-policy tightening from the Federal Reserve, ultimately pushing bond yields higher along with the U.S. dollar.

He added that there is room for the U.S. dollar to rally another 3%.

“The Two-year yield is at its highest level since 2008, the 10-year yield is at its highest point since March. As U.S. interest-rate potential picks up, it is going to reduce gold’s favor,” he said. “If the U.S. dollar is moving up and yields are moving up, then there is no real reason to hold gold.”

Jasper Lawler, head of research at the London Capital Group, said that he is also looking for lower gold prices in the near term; however, he added that any drop could be seen as a buying opportunity as investors could need safe-haven assets. He added that he is bearish on the precious metal since the price hasn’t been able to hold $1,300 an ounce.

“It looks like the lows are going to be taken out,” he said. “We could go pretty swiftly to $1,200.”

However, when looking long term, he said that there is still a fundamental reason investors should hold some gold in their portfolio.

“The [stock] market is so stretched and when it corrects and panic sets in, people will want gold in their back pocket,” he said.

Federal Reserve: The Good, The Bad And The Ugly

Early next week, U.S. President Donald Trump is expected to reveal his nomination to lead the Fed for the next four years. After months of speculation, the two front-runners are former Federal Reserve Governor Jerome Powell and Stanford economist John Taylor.

Lawler said that the nomination could be gold’s saving grace if Taylor, who is seen as the most hawkish among the candidates, does not get the presidential nod.

Vecchio said that markets see Powell as the least disruptive of the candidates and would be the mostly like to create stability in the marketplace as he would maintain the current monetary policy.

However, Vecchio said that no matter who leads the Fed, the risk is that market interest rates are underpricing future interest-rate hikes. A repricing of further monetary policy action would be bearish for gold.

CME 30-Day Fed fund futures are only pricing in one rate hike next year, while central bankers have said that they see three rate hikes.

“Markets pricing in a March rate hike could keep gold pinned lower in the foreseeable future,” said Vecchio.

Levels to watch

Baruch said that analysts should watch for a push above $1,280 an ounce to neutralize the current bearish sentiment. He added that a push back above $1,300 would bring investors back to the market.

On the downside, the first support level in focus for December gold futures among most analysts is the Oct. 6 low at $1,262.80 an ounce. A break below that level would make $1,250 the next downside target, which represents a trend line from the December 2015 lows.

Finally, a break below $1,250, analysts have said they expect prices to fall to $1,200 an ounce.

“For me the chart is looking pretty ugly and I think momentum is starting to turn in gold and we are going to see lower prices. If we get below $1,260 and then $1,250 it is a pretty slippery slope to $1,200,” said Vecchio.

The Final Say…

All markets will be waiting for Trump to release his nomination for the Federal Reserve but there is also a full slate of economic data to digest.

Interestingly, while there is major attention on who will be the next Fed Chair, not much interest is being paid to the actual meeting next week. There is no press conference nor updated economic projections so markets will only receive the central bank's monetary policy statement.

Markets will receive important manufacturing and service-sector data along with consumer confidence numbers, and the week ends with the release of the October employment report.

KitcoNews