(Kitco News) Gold is looking at its second month of losses in 2021 as markets end February, and analysts warn of further bearish stocks with the precious metal testing critical support levels.
After starting the year at around $ 1,912, the precious metal hit a new eight-month low of $ 1,714 on Friday – down nearly $ 200 since the beginning of the year.
And if the price of gold fails to hold $ 1,725 or $ 1,700 next week, the sale may not end, analysts told Kitco News. At the time of this writing, April’s Comex gold futures were trading at $ 1,729.10, down 2.61% on the day.
“Gold has surpassed recent lows and all weekly averages,” said Charlie Nedoss, senior market strategist at LaSalle Futures Group. “We could test $ 1,700 next week.”
The main triggers for the fall of gold were the US Treasury’s 10-year rising yields, which reached a 1.6% overnight high of overnight, and a stronger US dollar.
Friday’s settlement was also accelerated by technical sales, after the metal fell below the 200-day moving average, said Peter Hug, director of global trade at Kitco Metals.
“At the moment, you have the sale of computers accelerating the downward movement,” said Hug. “When we talked last Friday, we expected an upward movement in gold. But when we reached $ 1,817 on Monday, the 10-year yield was around 1.20%, now it is north of 1, 50%. “
This advance is important in comparison with the increase in productivity in other countries, said Hug. “It is significant in the sense that European and Japanese rates are still at zero. You have to compare income returns between countries. That is why you would expect the dollar to be stronger than where it is now, based on increased yields, “he explained.
Investors are also starting to abandon stocks and turn to cash, which is bad for gold, Hug added. “In the context of the stock markets, they are starting to stick to the chin with higher yields. Some people are leaving the stock market and entering the cash register. That is why there is also a weakness in commodities, ”he noted.
Next week, the $ 1,660 level is a possibility, said TD Securities’ head of global strategy Bart Melek.
Markets are more optimistic, Melek noted, pointing to faster-than-expected stimulus and vaccine implantation progress. The growing concern now is the monetary stimulus, accelerating inflation and making the interest curve more steep.
Fed, yields and inflation
Until the Federal Reserve is able to assure the markets that it will not raise rates sooner than expected and perhaps even signal that it may consider controlling the interest curve, the anxiety will persist.
“As long as there is this ambiguity, they can say that they will allow inflation to heat up, but as long as the curve tilts, gold will be concerned that the Fed is not committed to its ultra-loose policy,” said Melek. “That is why gold can settle even lower before jumping higher.”
Stocks start to plummet whenever yields rise, as investors are concerned that the Fed is underestimating inflation.
“If U.S. Treasury Secretary Janet Yellen or Fed Chairman Jerome Powell goes public and maybe even alludes to higher inflation expectations and says they will keep yields low, gold will take off,” said RJO Futures senior commodities broker Daniel Pavilonis. “But it could lead to yields rising to 2% before any response from the Fed.”
The Biden government wants to continue to see an easy monetary policy, more stimulus and a strong stock market. “But the more stimuli they receive, the more their income increases. They need to admit the problem and continue with the stimulus ”, noted Pavilonis.
In the long run, it is an entirely different story, as the United States economy will have to deal with a major shift in terms of closing deals, requiring low interest rates.
“Eventually, we should see gold better, especially with record debt and the stock market is a feeling of risk,” said Melek. “As soon as we establish ourselves and it becomes clear that the US economy is not so wonderful, there will be a recovery in gold. The market will accept that idea, and gold will start to rise. We can see that at the beginning of the second quarter.”
Data to watch
There are a number of Fed speakers to attend next week, especially as analysts question whether the Fed will handle the sudden rise in yields.
“The week will see a series of Fed speakers, including Fed President Powell, giving the Fed an opportunity to slow down the Treasury’s decline, at least by beginning to express some concern – which has been remarkably lacking so far,” said strategists. of ING FX.
Fed’s Powell is due to speak on the US economy on Thursday at The Wall Street Journal Jobs Summit. The event will be broadcast live.
In terms of macro data, there will be the manufacturing US ISM PMI on Monday, the change of non-agricultural jobs at ADP and the non-manufacturing ISM on Wednesday, claims for unemployment benefits and factory orders on Thursday. fair, as well as the biggest event of the week – non-farm payrolls on Friday.
The market consensus is calling for the February employment report to show an increase of 165,000 jobs and for the unemployment rate to remain at 6.3%.
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