(Kitco News) Has gold hit its trough at this week’s low in 10 months? Analysts are waiting to see if the precious metal can hold the $ 1,700 an ounce level and break away from treasury markets chains.
After falling to the low of $ 1,675 on Monday, April Comex gold futures rebounded above $ 1,730.
On Friday, gold fell on the day, but it was able to hold the $ 1,700 an ounce level in light of higher government bond yields. The bond market sell-off continued after US President Joe Biden signed his $ 1.9 trillion stimulus bill on Thursday. At the time of writing, April Comex’s gold futures were trading at $ 1,717.90, down 0.27% one day.
“The 10-year yield is rising, and the curve is getting steeper. Even the short end of the curve has gotten steeper. This could continue if we see good economic data and talk about inflation. is not a good story for gold, “Bart Melek, head of TD Securities’ global strategy, told Kitco News.” Precious metals are being held hostage by treasury markets. “
Everything about yields
10-year US Treasury yields rose above 1.6% overnight. “The yields are still playing. We thought $ 1,675 could be the lowest point in gold. But it all depends on the yields and whether they continue to rise,” said Daniel Pavilonis, senior commodity broker at RJO Futures.
The $ 1.9 trillion stimulus package is also inflationary. “The market expects consumers to go out and buy goods with that money,” said Kevin Grady, president of Phoenix Futures and Options LLC.
Once everyone in the US is vaccinated, the yield curve will react, and gold could have a hard time, Melek noted.
In addition, markets are starting to price more incentives, including infrastructure spending.
“If printing money, higher yields and foreign buyers selling our debt are the new MO, there is now more reason to buy emerging markets. The stimulus is ultimately a signal to the rest of the world that we are not doing well. are ready, and we are swinging to pump up more money to save governments, ”Pavilonis said.
Eyes on the Fed next week
The current correlation between yields and gold is that as yields rise, gold falls. This could change in the future, and once it does, gold could rise, Pavilonis noted.
Ultimately, that correlation will break. The Federal Reserve admits that we are seeing inflation and that we may have to raise interest rates sooner than we thought would break that correlation. Or even just admit that rising yields are a problem. That would be optimistic for gold, ” he said.
The Fed has largely ignored the issue so far, which is why next week all eyes will be on Fed Chairman Jerome Powell, who is holding his press conference following the central bank’s announcement on Wednesday.
Even the European Central Bank (ECB) came out on Thursday and said it was concerned about inflation and money printing, Pavilonis noted. The ECB said it would use its Pandemic Emergency Purchase Program (PEPP) to stop any unjustified rise in the cost of debt financing.
ECB President Christine Lagarde “casually said that higher interest rates could translate into premature tightening of funding across all sectors of the economy,” Pavilonis said. She also noted that the ECB wants to maintain favorable financial conditions with looming inflation.
“If the Fed were to say something similar, it would be optimistic for gold … The fact that interest rates are rising may indicate that the Fed is losing control,” Pavilonis said.
Melek said Powell is unlikely to make any significant new comments on the yield curve. “Powell will assure us that it is too early to talk about interest rate hikes. He was quite ambiguous last time when yields soared and risk appetite was not hurt,” he said.
Powell could try to “cut yields,” Grady added.
Markets will also take a look at the Fed’s updated quarterly projections. And ING economists expect an upward revision of GDP for 2021.
“There will also be a lot of interest in the Fed Funds rate Dot Plots. Will the Fed’s 2023 Dot Plot median shift to an increase of 25 bps? Probably not, but the dollar would likely rise if it did. unaltered FOMC statement and a Jay Powell press conference reiterating that the Fed still has a long way to go before its stimulus phasing out should keep the dollar from running too far ahead, “the economists said.
Price levels
According to the analysts, it is critical to see how gold behaves around the $ 1,700 an ounce level next week. A move towards USD 1,760 would signal a possible rally, while a drop below USD 1,670 could open the door to USD 1,600 an ounce, they said.
“Gold can bounce around here and consolidate to move up; it needs to get above $ 1,760 to be confirmed,” Pavilonis said. “The USD 1,670 level is support. If that shakes up, we could be looking at USD 1,600.”
Gold must hold $ 1,700, said LaSalle Futures Group senior market strategist Charlie Nedoss. “I want to see what it does for $ 1,700,” he said.
Melek added that short-term coverage is highly likely. But if the US dollar and earnings continue to rise, gold could retest $ 1,660 an ounce next week.
Grady pointed out that being short gold is dangerous right now, while at the same time it is not beneficial to be long gold either. “Being short in the market where so much money is being printed and promoted is dangerous. But every time gold rises, it is sold. “That’s why I’m neutral.”
Other data to keep an eye on
There will also be a string of new economic data to keep an eye out for next week. The data releases begin Monday with the NY Empire State Manufacturing index and US retail sales and industrial production on Tuesday.
US housing begins and building permits come out Wednesday, followed by the Philadelphia Fed manufacturing index and unemployment claims on Thursday.
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