(Kitco News) The first week of March was detrimental to gold, as prices surpassed the psychological level of $ 1,700. Now, the key question in everyone’s mind is how much lower can gold fall before it hits rock bottom?
With a drop of more than $ 200 since the beginning of the year, gold investors are looking for the magic line in the sand that will signal the end of the downward trend. At the time of this writing, April’s Comex gold futures were trading at $ 1,699.10, down 2.8% on the week.
The main culprit has been the increase in the yield of the US Treasury in 10 years, which has unleashed a stronger dollar that is weighing on gold. And this week’s message from Federal Reserve Chairman Jerome Powell, who largely ignored concerns about inflation and rising yields, did not help.
“Powell’s failure to react to the recent rise in bond yields has taken the brilliance out of holding gold. It has provided an optimistic short-term outlook for the dollar, which is weighing on gold. We will have a week and a half of no Fed comment, which is the blackout period until the next monetary policy meeting on March 17, “OANDA senior market analyst Edward Moya told Kitco News. “We will see the bond market run free. At the moment, there are some short-term pressures that can keep gold vulnerable.”
The markets are concerned about the sudden increase in yields. There was an expectation that Powell would hint at some plan to prevent the long end of the curve from rising further, said Peter Hug, director of global trade at Kitco Metals.
“In response, stocks and the commodity complex as a whole sold at higher rates and a stronger dollar,” Hug said on Friday.
However, analysts still expect the Fed to get involved eventually – probably when 10-year yields rise north of 1.75%.
“A move above 1.7% in 10-year Treasury yields is not a big deal. If we get to the north of 1.75% and flirt with 2%, that would be significant,” said Hug. “At 1.75% north, the Fed will start looking at this more seriously.”
As soon as 10 years start to challenge 2%, the alarm will sound; stock markets will react negatively, said TD Securities’ head of global strategy Bart Melek.
“This will get in the way of this whole idea of an environment of stable monetary conditions,” he said. “What the Fed is looking at is not just yields, but broader financial conditions. As soon as the central bank makes it clear that there is a red line for yields, we can see gold doing better.”
‘Gold is at a critical point’
As the focus remains on rising yields and the dollar, what does this mean for gold in the short term?
Gold may be looking at the $ 1,685 level next week, which is expected to hold, according to Hug. “Gold is at a critical technical point if you follow the Fibonacci indicators,” he said. “I expect a jump here from a technical perspective – gold will close and trade $ 1,700 next week, which is a psychological level. $ 1,725 is the next level of resistance, followed by $ 1,750.”
However, there is a clear risk of falling to $ 1,660, and even less, Melek pointed out, citing the need for the Fed to clarify exactly when and under what conditions the central bank could intervene to control the interest curve. “Good economic numbers next week could make the low of 1600 a zone, rather than a sudden stop,” he said.
If gold fails to hold $ 1,675 next week, the market could see $ 1,610, Walsh Trading co-director Sean Lusk told Kitco News. “We need to settle at least over $ 1,675 next week, or all bets are off.”
If the main support levels are not maintained, gold could quickly drop to $ 1,600, added Moya, noting that this would be a likely fund.
“I anticipate that we can now see $ 1,600 – a sudden crash. But it is also where buyers would emerge strongly. This will be an attractive buying point for many institutional investors,” said Moya.
Hug is still constructive for gold in the medium term, adding that the fiscal stimulus will not go away anytime soon, with the Fed not planning to reverse the policy until 2022. “If the long end of the curve continues to rise, the Fed will create stocks to keep it under control, “he noted.
Melek is also optimistic about gold in late 2021, noting that prices will be significantly higher in 2022.
“There are huge debts, worries about the currency devaluation, and the government has no choice but to monetize all these papers. We will have inflation. And as soon as the market adjusts to that, long positions will go back to gold,” he said. .
Events to watch next week
Economic data will continue to improve over the next week and eyes will be on progress towards the $ 1.9 trillion stimulus package over the weekend.
“You will probably see a lot of optimism as the outlook continues to improve. We will start to see Texas reopen, and that will be very positive for the job market and for economic activity. There is a sharp rise in economic data. This will increase yields, “said Moya.
Mutations of viruses and their impact on the United States are something to be observed closely, as this could hinder the long-awaited economic recovery, he added. “If mutations of the virus become a problem in the United States, it could hinder the idea of reopening, reducing yields and increasing gold.”
US inflation data will also be important next week, with market consensus estimating the annual CPI core number at 1.4% in February.
“This week’s inflation is expected to rise a little more, mainly due to the increase in gasoline prices, with the annual inflation rate set to reach 1.6% of 1.4%, while the core (ex-food and energy) remains at 1.4% “, said ING Economists.
In addition, the Bank of Canada and the European Central Bank will make their monetary policy announcements on Wednesday and Thursday, respectively. Significant changes in rates are not expected. Traders will also be watching US unemployment claims on Thursday and PPI data on Friday.
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