(Kitco News) Gold was hit by a series of negative news this week, and the price disappointment reflected that, with the precious metal dropping $ 45 since last week’s close. But the question in everyone’s mind is how far can gold fall before entering a new bullish phase?
The average level of $ 1,700 is a great buying opportunity, according to analysts. Still, that does not mean that gold will not fall to even lower levels next week.
This week’s primary downward pressure came from rising US Treasury yields mixed with the stronger US dollar.
“If you look at gold in a basket with other metals, only gold has fallen. Silver is doing well, as well as platinum, palladium and rhodium. You are getting a very significant consistent buying interest in white metals and industries, “said Peter Hug, director of global trade at Kitco Metals. “Gold was affected because of the significant increase in 10-year yield.”
Yield on 10-year Treasury bonds started the week at 1.15% and rose to 1.33% on Friday. “This decreased gold slightly because the increase in yields generated strength in the US dollar,” explained Hug.
The headlines were also not very encouraging, with BlackRock choosing silver over gold and DoubleLine CEO Jeffrey Gundlach choosing bitcoin over gold as a better “stimulus asset”.
Gold prices fell throughout the week until they reached an 8-month low of $ 1,760.40 on Thursday, which triggered a small rebound. At the time of this writing, April’s Comex gold futures were trading at $ 1,781.20, up 0.41% on the day.
Where next?
The next week will be about where the US dollar moves, senior LaSalle Futures Group market strategist Charlie Nedoss told Kitco News. “The strength of the dollar may decrease in the coming week, and we can see gold bouncing off the bottom,” said Nedoss.
The fact that gold is currently trading above $ 1,778 gives the precious metal a chance to rise next week, Hug pointed out. “This is based on technical data, assuming that gold could be above that level at the close above it. I prefer to be bought on the market at $ 1,775 an ounce than sold,” he said.
In addition, the underlying impression of inflation appears to be accelerating, Hug noted, citing stronger PPI data. “I consider these retractions to be buying opportunities, not opportunities to panic and liquidate,” he said.
On the positive side, we need to go through $ 1,800, which is not a significant resistance level, and then need to go through $ 1,825 before returning to the $ 1,900 uptrend, “said Hug.
But if sales accelerate next week, gold should be ready to test $ 1,750 and then $ 1,725. “I don’t think it’s likely, however,” he added.
If yields and stocks continue to rise, gold could be at much lower levels, warned RJO Futures senior commodities broker Daniel Pavilonis.
“If stocks get stronger, yields get stronger and gold reaches a level where, if we start to close below yesterday’s $ 1,766 low, we could fall much more,” said Pavilonis. “For me, this is the line in the sand. If we stay above it, we will be limited.”
Gold may even reach $ 1,200 this year, before resuming its upward trend, noted Pavilonis. “It is not going to drop straight to $ 1,200, but as real rates go up, it will end up weighing on gold before this dynamic change,” he said. “The $ 1,527 level would be the first real support.”
On the negative side, gold is at risk of losing another $ 100, added Melek, citing rising yields. “The interest rate curve continues to tilt without inflation rising. Real rates are rising,” he said. “If we can get real interest rates to rise, it will be very difficult to see large flows into gold.”
Another obstacle for gold is its competition with bitcoin. Cryptocurrency is being treated as digital gold by investors, added Pavilonis.
“If we put bitcoin in the same field as metals, it has outgrown gold and silver. That’s what people are looking at now. Gold has traditionally been an alternative – a hedge against inflation if you want to get out of the system. Like bitcoin is also being perceived, “he said. “But as bitcoin gets more expensive, investors are wondering why not buy gold?”
Powell’s Testimony
Next week, one of the main events will be the testimony of Federal Reserve President Jerome Powell, before the US Senate on Tuesday.
Markets will seek further confirmation that the Fed will be ignoring rising inflation and keeping rates close to zero. Investors will also want to see under what conditions the Fed would be considering introducing control of the interest curve.
“If the Fed really starts raising rates because we are starting to see accelerating inflation, this will be a crucial moment for gold,” said Pavilonis. “Previously, Powell said the Fed is letting inflation go. I think that would cause futures to fall and yields to go up, it could cause gold to fall.”
The words Powell will choose to use will be critical because his testimony is linked to the publication of the Federal Reserve’s half-yearly monetary policy report, ING economists said.
“It will be a difficult path for Powell to follow,” said economists. “It will be difficult to argue that the economy remains weak and the risks are inclined to the negative side, but he will not want to sound too optimistic, as this can trigger sudden upward movements in Treasury yields, which can prevent the recovery and the result in the broader volatility of the market. “
The focus will also be on the US stimulus package next week, which is likely to see more US officials stressing how critical it is to approve it.
“Powell can reiterate that there is a need for more fiscal stimulus. Treasury Secretary Janet Yellen has already spoken out and indicated that it is essential that the stimulus package is released. There is enough energy behind the concept for a stimulus package to be approved, “Hug said. “However, there are some issues that remain. We are seeing some resistance not only from Republicans, but also from Democrats. I want to see if they have to dilute the project.”
Data to watch
The big macro data day will be Thursday, with preliminary GDP for the fourth quarter of the US, durable goods and claims for unemployment benefits all open. Markets will also digest the PCE price index on Friday.
Other data will include the US house price index and CB consumer confidence on Tuesday, followed by new home sales on Wednesday.
“The US data in the following week should be a modest upward revision of the 4Q20 GDP and then, on Friday, the January personal income numbers. This is expected to jump due to checks by stimulus – but it must already be priced. We will also see the Fed’s preferred inflation measure – the PCE deflator – which is expected to be contained close to 1.4 / 1.5% YoY in January, “stressed ING FX strategists.
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