(Kitco News) Has gold reached its bottom in the 10-month low this week? Analysts are waiting to see if the precious metal can maintain the $ 1,700 an ounce level and break free from Treasury market chains.
After plummeting to the low of $ 1,675 on Monday, April’s Comex gold futures rebounded above $ 1,730.
On Friday, gold fell on the day, but was able to maintain the $ 1,700 an ounce level in the face of the Treasury’s higher yields. The liquidation of the bond market continued after US President Joe Biden sanctioned his $ 1.9 trillion stimulus project on Thursday. At the time of this writing, April’s Comex gold futures were trading at $ 1,717.90, down 0.27% on the day.
“10-year yields are going up and the curve is sloping more. Even the short end of the curve has tilted upwards. This may continue as we see good economic numbers and talk about inflation. More risk appetite leads to yields fired, and it’s not a good story for gold, ”TD Securities’s head of global strategy, Bart Melek, told Kitco News. “Precious metals are held hostage by the Treasury markets.”
All about income
The 10-year US Treasury yields rose above 1.6% overnight. “Yields are still at stake. We think $ 1,675 could be the downside of gold. But it all depends on yields and whether they continue to rise,” said RJO Futures senior commodities broker Daniel Pavilonis.
The $ 1.9 trillion stimulus package is also inflationary. “The market expects consumers to start going out and buying goods with that money,” noted Phoenix Futures and Options LLC President Kevin Grady.
Once everyone is vaccinated in the United States, the yield curve will respond, and gold may struggle, noted Melek.
In addition, markets are starting to price more stimulus measures, including spending on infrastructure.
“If printing money, higher yields and foreign buyers selling our debt is the new MO, there is more reason to buy emerging markets now. The stimulus is ultimately a signal to the rest of the world that we are not in good shape. way, and we wave to inject more money to rescue governments, “said Pavilonis.
With an eye on the Fed next week
The current correlation between yields and gold is that, as yields increase, gold decreases. That may change in the future, and once it does, gold may rise further, Pavilonis noted.
“Eventually, that correlation will be broken. The Federal Reserve admitting that we are seeing inflation and we may have to raise rates sooner than previously thought would break that correlation. Or even admitting that rising yields is a concern. That would be optimistic for the gold, “he said.
The Fed has largely ignored the issue so far, which is why all eyes will be on Fed Chairman Jerome Powell next week as he gives his press conference after the central bank’s interest rate announcement on Wednesday.
Even the European Central Bank (ECB) came out on Thursday saying it is concerned about inflation and the printing of money, noted Pavilonis. The ECB said it would use its Pandemic Emergency Purchase Program (PEPP) to halt any unjustified increases in debt financing costs.
ECB President Christine Lagarde “said indifferently that higher yields could translate into premature financing constraints in all sectors of the economy,” Pavilonis described. She also noted that the ECB wants to preserve favorable financial conditions with inflation approaching.
“If the Fed came and said something similar, that would be bullish for gold … The fact that yields are rising may show that the Fed is losing control,” said Pavilonis.
Melek said Powell is unlikely to make any significant new comments about the interest curve. “Powell will assure us that it is too early to talk about raising interest rates. He was quite ambiguous the last time when yields have risen dramatically and risk appetite has not been harmed,” he said.
Powell may try to “talk down earnings,” added Grady.
In addition, markets will take a look at the Fed’s updated quarterly projections. And ING economists are expecting a 2021 upward revision of GDP.
“There will also be a lot of interest in the point graphs of the Fed funds rate. Does the Fed 2023 point graph change to a 25 basis point increase? Probably not, but the dollar would probably go up if it did. However, a statement of the FOMC virtually unchanged and a press conference by Jay Powell repeating that the Fed has a long way to go before reducing the stimulus prevents the dollar from going too far ahead, “said economists.
Price levels
It is critical to see how gold behaves next week around the $ 1,700 an ounce level, according to analysts. A move towards $ 1,760 would signal a possible recovery, while a fall below $ 1,670 could open the door to $ 1,600 an ounce, they said.
“Gold may be jumping around here and consolidating into a higher movement; it needs to reach more than US $ 1,760 to confirm it,” said Pavilonis. “The $ 1,670 level is support. If that happens, we could be looking at $ 1,600.”
Gold will need to hold $ 1,700, said senior market strategist at LaSalle Futures Group, Charlie Nedoss. “I want to see what he does for $ 1,700,” he said.
Melek added that short-term coverage is very likely. But if the US dollar and yields continue to rise, gold could test $ 1,660 an ounce again next week.
Grady pointed out that it is dangerous to be short gold now, while at the same time, it is also not beneficial to be long gold. “Being exposed to gold in the market that has so much impression of money and stimulus is dangerous. But every time gold goes up, it is being sold. Traders want to watch or follow this trend,” he said. “That is why I am neutral.”
Other data to watch
There will also be a list of new economic data to monitor next week. The released data will begin with the NY Empire State manufacturing index on Monday and US retail sales and industrial production on Tuesday.
The start of housing construction and building permits in the U.S. is expected to be released on Wednesday, followed by the Philadelphia Fed manufacturing index and requests for unemployment benefits on Thursday.
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