(Kitco News) Gold looks to its second month of losses in 2021 as markets round out February, and analysts warn of more downward action as the precious metal tests critical support levels.
After the start of the year around $ 1,912, the precious metal hit a new eight-month low of $ 1,714 on Friday – nearly $ 200 lower since the start of the year.
And if the gold price doesn’t hold $ 1,725 or $ 1,700 next week, the sell-off may not be over, analysts told Kitco News. At the time of writing, April Comex’s gold futures were trading at $ 1,729.10, down 2.61% one day.
“Gold broke through the recent lows and all weekly averages,” said Charlie Nedoss, senior market strategist at LaSalle Futures Group. “We can test $ 1,700 next week.”
The main downward triggers for gold were rising US 10-year Treasury yields, which hit a one-year high of 1.6% overnight, and a stronger US dollar.
Friday’s sell-off was also accelerated by tech sales after the metal fell below the 200-day moving average, said Peter Hug, Kitco Metals’ global trading director.
“Right now you have computers that are speeding up the move,” said Hug. “When we spoke last Friday, we were looking for an upward move in gold. But when we hit $ 1,817 on Monday, the 10-year return was around 1.20%, now north of 1.50%. “
This advance is significant compared to the rise in revenues in other countries, Hug noted. “It is significant in the sense that European and Japanese interest rates are still at zero. You have to compare the returns of the different countries. Therefore, you would expect the dollar to be stronger than where it is now based on rising returns. ” he explained.
Investors are also starting to get out of stocks and switch to cash, which is bad for gold, Hug added. “In the context of the stock markets, they are starting to take it on the chin with higher yields. Some people are leaving the stock market and going to cash. That’s why you have a weakness in commodities,” he noted.
Next week, the USD 1,660 level is very possible, said Bart Melek, TD Securities’ global strategy chief.
Markets are more optimistic, Melek noted, noting the progress of stimulus measures and a faster-than-expected deployment of vaccines. The growing concern now is that stimulus money is accelerating inflation and making the yield curve steeper.
Fed, interest and inflation
Until the Federal Reserve can successfully assure markets that it will not raise interest rates earlier than expected and perhaps even signals it might consider controlling the yield curve, fear will persist.
“As long as there is that ambiguity, they can say they will keep inflation going up, but as long as the curve gets steeper, Gold will worry that the Fed isn’t stuck with its ultra-loose policies,” Melek said. . “This is why gold could settle even lower before bouncing higher.”
Stocks start to rally every time interest rates rise as investors worry that the Fed is underpricing inflation.
“If US Treasury Secretary Janet Yellen or Fed Chairman Jerome Powell come out and perhaps even allude to higher inflation expectations and say they will keep yields low, gold will boom,” said Daniel Pavilonis, senior commodity broker at RJO Futures. “But it may take interest rates to reach 2% before there is a response from the Fed.”
The Biden administration wants to continue to see loose monetary policy, more stimulus and a strong stock market. “But the more incentives they get, the more yields get higher. They must admit the problem and get on with the incentive,” Pavilonis said.
In the longer term, it’s a completely different story as the US economy will face massive disruption in terms of business closures, which require low interest rates.
“Ultimately, we should see gold better, especially with the debt and equity market record being risky sentiment,” Melek said. “Once we settle in and it becomes clear that the US economy is not that great, there will be a revival of gold. The market will get on that idea and gold will start to rise. We could see this at the beginning of the year. the second quarter. “
Data to view
There are a number of Fed speakers to keep an eye on next week, especially as analysts wonder if the Fed will tackle the sudden rise in interest rates.
“The week will see a slew of Fed speakers, including Fed Chairman Powell, offering the Fed an opportunity to slow the Treasury decline by voicing at least some concern – notably lacking so far”, said ING FX strategists.
Fed’s Powell will speak about the US economy at The Wall Street Journal Jobs Summit on Thursday. The event will be streamed live.
In terms of macro data, Monday is the US ISM production PMI, the ADP change in non-farm employment and ISM non-production on Wednesday, unemployment claims and factory orders on Thursday, as well as the biggest event of the week. – non-farm payrolls. on Friday.
Market consensus calls for the February employment report to add 165,000 jobs and keep the unemployment rate at 6.3%.
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